Chilean Competitiveness: Ready for the Next Stage?

Transcription

1 Chilean Competitiveness: Ready for the Next Stage? Professor Michael E. Porter Institute for Strategy and Competitiveness Harvard Business School May 2011 This presentation draws on ideas from Professor Porter s articles and books, including, The Competitive Advantage of Nations (The Free Press, 1990), The Microeconomic Foundations of Economic Development, in The Global Competitiveness Report, (World Economic Forum), Clusters and the New Competitive Agenda for Companies and Governments in On Competition (Harvard Business School Press, 2008) and ongoing research at the Institute for Strategy 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 1 Copyright 2011 Professor Michael E. Porter

2 PPP-adjusted GDP per Capita, 2010 ($USD) Prosperity Performance Across Countries OECD Average: 3.04% Norway $50,000 United States $40,000 Netherlands Ireland Canada Austria Sweden Denmark Belgium Germany France Finland United Kingdom Japan Australia Switzerland OECD Average: $31,423 $30,000 Italy New Zealand Spain Greece Israel Slovenia Czech Republic South Korea $20,000 Portugal Hungary Estonia Slovakia Poland $10,000 Latin American countries Note: Luxembourg omitted Source: EIU (2011), authors calculations Turkey Chile Mexico Argentina Brazil Colombia Peru Other OECD countries $0 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2005 to Copyright 2011 Professor Michael E. Porter

3 Index of Inequality (2006)* High inequality Honduras Income Inequality Selected Countries Colombia Panama Nicaragua Ecuador Dominican Republic Mexico Costa Rica Bolivia El Salvador Argentina Venezuela Peru China Guatemala USA Philippines Russia Turkey Kyrgyz Republic Uruguay Kazakhstan Cambodia Ukraine Malaysia Georgia Indonesia Latvia Portugal Romania Jordan Serbia India Vietnam Bosnia Macedonia Lithuania Moldova Greece Taiwan Poland Egypt Bangladesh UK Estonia Tajikistan Ireland New Zealand Italy Albania Pakistan Spain Bulgaria Hungary Australia Croatia Slovenia France Belgium Germany Slovakia Netherlands Finland Austria Czech Rep. Sweden Low inequality Deteriorating Improving Change in Inequality ( ) Brazil Chile Paraguay Note: * latest data available used (in some cases earlier years data used) Source: World Bank, World Development Indicators, 2008, United Nations University (UNU-WIDER) Latin American countries Other OECD countries Denmark Jamaica 3 Copyright 2011 Professor Michael E. Porter

4 Chile s Economic Situation in 2011 Impressive management of the global economic crisis Chile hit by dramatic but short-lived terms-of-trade shock Long-term economic performance remains ahead of Latin American peers Overall prosperity growth remains respectable and has driven poverty rates to low levels An increase in labor force mobilization has supported growth but remains low compared to peers, especially for women and young workers 4 Copyright 2011 Professor Michael E. Porter

5 Labor Force Participation Rate, % Labor Force Utilization Participation Rates, Selected Countries 55% 50% Denmark Japan United States Iceland Germany Norway Sweden United Kingdom Finland Slovakia Switzerland Canada Australia Czech Republic New Zealand Portugal Estonia Ireland South Korea Brazil Spain 45% 40% Colombia France Netherlands Poland Italy Argentina Belgium Slovenia Austria Hungary Mexico Israel Greece Chile Latin American countries Other OECD countries Peru 35% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% Change in Labor Force Participation Rate, 2000 to 2010 Note: Luxembourg omitted. Source: EIU (2011), authors calculations 5 Copyright 2011 Professor Michael E. Porter

6 Chile s Economic Situation in 2011 Impressive management of the global economic crisis Chile hit by dramatic but short-lived terms-of-trade shock Long-term economic performance remains ahead of Latin American peers Overall prosperity growth remains respectable and has driven poverty rates to low levels An increase in labor force mobilization has supported growth but remains low compared to peers, especially for women and young workers BUT There has been a slow-down of growth, both absolute and in comparison to peers 6 Copyright 2011 Professor Michael E. Porter

7 Chilean Real GDP Growth Decomposition by Growth Contribution Source: OECD (2011) 7 Copyright 2011 Professor Michael E. Porter

8 Chile s Economic Situation in 2011 Impressive management of the global economic crisis Chile hit by dramatic but short-lived terms-of-trade shock Long-term economic performance remains ahead of Latin American peers Overall prosperity growth remains respectable and has driven poverty rates to low levels An increase in labor force mobilization has supported growth but remains low compared to peers, especially for women and young workers BUT There has been a slow-down of growth, both absolute and in comparison to peers Resilience of high inequality remains a serious problem Productivity growth has stagnated Productivity growth is increasingly dependent on capital deepening Sectoral change towards higher productivity industries has slowed Within sector productivity growth remains low 8 Copyright 2011 Professor Michael E. Porter

9 Real GDP per employee (1990 GK$), 2010 $80,000 Labor Productivity Level and Growth OECD average: 1.37% Selected Countries $70,000 United States $60,000 $50,000 Belgium France Norway UK Finland Canada Austria Australia Denmark Netherlands Italy Germany Israel Japan Ireland Sweden Iceland South Korea Estonia $40,000 $30,000 Switzerland Spain New Zealand Chile Portugal Greece Argentina Slovenia Czech Republic Poland Turkey OECD average: $42,177 Slovak Republic $20,000 $10,000 Hungary Mexico Colombia Peru Brazil Latin American countries Other OECD countries $0 0% 1% 2% 3% 4% 5% Growth of real GDP per employee, 2000 to 2010 Note: Luxembourg omitted Source: Groningen Growth and Development Centre, Total Economy Database (January 2011). GDP calculated using Geary Khamis calculation methodology. 9 Copyright 2011 Professor Michael E. Porter

10 Chile s Economic Situation in 2011 Impressive management of the global economic crisis Chile hit by dramatic but short-lived terms-of-trade shock Long-term economic performance remains ahead of Latin American peers Overall prosperity growth remains respectable and has driven poverty rates to low levels An increase in labor force mobilization has supported growth but remains low compared to peers, especially for women and young workers BUT There has been a slow-down of growth, both absolute and in comparison to peers Resilience of high inequality remains a serious problem Productivity growth has stagnated Productivity growth is increasingly dependent on capital deepening Sectoral change towards higher productivity industries has slowed Within sector productivity growth remains low Export growth is disappointing, especially if the effects of resource price increases are removed 10 Copyright 2011 Professor Michael E. Porter

11 Exports of Goods and Services (% of GDP), % Export Performance Selected Countries OECD Average: -5.15% 90% Hungary 80% Estonia Belgium Netherlands Slovakia Czech Republic 70% 60% Slovenia Austria Iceland 50% 40% 30% 20% 10% Sweden OECD Average: 47.70% Finland Norway Israel Canada New Zealand Spain Portugal UK Italy France Australia Greece Turkey Japan Colombia USA Latin American countries Brazil Other OECD countries 0% -16% -12% -8% -4% 0% 4% 8% 12% 16% 20% 24% 28% Change in Exports of Goods and Services (% of GDP), 2000 to 2010 Note: Luxembourg omitted Source: EIU (2011), authors calculations Switzerland South Korea Denmark Germany Poland Chile Mexico Peru Argentina 11 Copyright 2011 Professor Michael E. Porter

12 Copper Price Effects on Exports Total Export Revenues (US$M)) $80,000 $70,000 Actual Chilean Exports $60,000 Exports assuming 2005 copper prices $50,000 $40,000 Exports assuming 2000 copper prices $30,000 $20,000 $10,000 $ Source: EIU (2011), COMTRADE (2011), author analysis 12 Copyright 2011 Professor Michael E. Porter

13 Chile s Economic Situation in 2011 Impressive management of the global economic crisis Chile hit by dramatic but short-lived terms-of-trade shock Long-term economic performance remains ahead of Latin American peers Overall prosperity growth remains respectable and has driven poverty rates to low levels An increase in labor force mobilization has supported growth but remains low compared to peers, especially for women and young workers BUT There has been a slow-down of growth, both absolute and in comparison to peers Resilience of high inequality remains a serious problem Productivity growth has stagnated Productivity growth is increasingly dependent on capital deepening Sectoral change towards higher productivity industries has slowed Within sector productivity growth remains low Export growth is disappointing, especially if the effects of resource price increases are removed Innovation output is weak 13 Copyright 2011 Professor Michael E. Porter

14 Average U.S. utility patents per 1 million population, Innovative Output Selected Countries, 1999 to Malaysia Latin American countries Other countries Croatia Bulgaria 2 1 South Africa Lithuania Costa Rica United Arab Emirates Russia Slovakia Estonia Argentina Uruguay Belarus Saudi Arabia Ukraine Venezuela Brazil Romania Ecuador Thailand Philippines Peru Indonesia Kenya Egypt Colombia Source: USPTO (2010), Groningen Growth and Development Centre, Total Economy Database (2010) CAGR of US-registered patents, 1999 to 2009 China India 0 Chile -15% -5% 5% 15% 25% 35% 45% 10,000 patents (avg ) = 14 Copyright 2011 Professor Michael E. Porter

15 Chile s Economic Situation in 2011 Impressive management of the global economic crisis Chile hit by dramatic but short-lived terms-of-trade shock Long-term economic performance remains ahead of Latin American peers Overall prosperity growth remains respectable and has driven poverty rates to low levels An increase in labor force mobilization has supported growth but remains low compared to peers, especially for women and young workers BUT There has been a slow-down of growth, both absolute and in comparison to peers Resilience of high inequality remains a serious problem Productivity growth has stagnated Productivity growth is increasingly dependent on capital deepening Sectoral change towards higher productivity industries has slowed Within sector productivity growth remains low Export growth is disappointing, especially if the effects of resource price increases are removed Innovation output is weak Traditional strengths in macroeconomic policy and openness have been preserved but are increasingly insufficient 15 Copyright 2011 Professor Michael E. Porter

16 Chile s Economic Situation in 2011 Impressive management of the global economic crisis Chile hit by dramatic but short-lived terms-of-trade shock Long-term economic performance remains ahead of Latin American peers Overall prosperity growth remains respectable and has driven poverty rates to low levels An increase in labor force mobilization has supported growth but remains low compared to peers, especially for women and young workers BUT There has been a slow-down of growth, both absolute and in comparison to peers Resilience of high inequality remains a serious problem Productivity growth has stagnated Productivity growth is increasingly dependent on capital deepening Sectoral change towards higher productivity industries has slowed Within sector productivity growth remains low Export growth is disappointing, especially if the effects of resource price increases are removed Innovation output is weak Traditional strengths in macroeconomic policy and openness have been preserved but are increasingly insufficient Chile is in the midst of a complex but necessary transition towards a new competitiveness paradigm 16 Copyright 2011 Professor Michael E. Porter

17 What is Competitiveness? Competitiveness is determined by the productivity with which a nation uses its human, capital, and natural resources. Productivity sets the standard of living (wages, returns on capital, returns on natural resources) that a country can sustain It is not what industries a nation competes in that matters for prosperity, but how it competes in those industries Productivity in a national economy arises from a combination of domestic and foreign firms The productivity of local or domestic industries is fundamental to competitiveness, not just that of export industries 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 17 Copyright 2011 Professor Michael E. Porter

18 Determinants of Competitiveness Microeconomic Competitiveness Quality of the National Business Environment State of Cluster Development Sophistication of Company Operations and Strategy Macroeconomic Competitiveness Social Infrastructure and Political Institutions Macroeconomic Policies Endowments Macroeconomic competitiveness creates the potential for high productivity, but is not sufficient Productivity ultimately depends on improving the microeconomic capability of the economy and the sophistication of local competition 18 Copyright 2011 Professor Michael E. Porter

19 Quality of the National Business Environment Context for Firm Strategy and Rivalry Factor (Input) Conditions Access to high quality business inputs Human resources Capital availability Physical infrastructure Administrative and information infrastructure (e.g., registration, permitting, transparency) Scientific and technological infrastructure Efficient access to natural endowments Local rules and incentives that encourage investment and productivity e.g. salaries, incentives for capital investments, intellectual property protection, corporate governance standards Open and vigorous local competition Openness to foreign competition Competition laws Related and Supporting Industries Availability of suppliers and supporting industries Demand Conditions Sophisticated and demanding local customers and needs e.g., Strict quality, safety, and environmental standards Consumer protection laws Many things matter for competitiveness Successful economic development is a process of successive upgrading, in which the business environment improves to enable increasingly sophisticated ways of competing 19 Copyright 2011 Professor Michael E. Porter

20 Competition The Chilean economy is highly open The presence of foreign companies is relatively low and local rivalry limited 20 Copyright 2011 Professor Michael E. Porter

21 Intensity of Local Competition Selected Industries; Price-Cost Margins Source: OECD (2011) 21 Copyright 2011 Professor Michael E. Porter

22 Competition The Chilean economy is highly open The presence of foreign companies is relatively low and local rivalry limited Product markets are relatively heavily regulated 22 Copyright 2011 Professor Michael E. Porter

23 Fraser Institute Policy Potential Index, Policy Environment for Mining Investments Selected Locations Source: Fraser Institute (2011) 23 Copyright 2011 Professor Michael E. Porter

24 Product Market Regulation, 2008 Index of Product Market Regulation Source: OECD (2011) 24 Copyright 2011 Professor Michael E. Porter

25 Competition The Chilean economy is highly open The presence of foreign companies is relatively low and local rivalry limited Product markets are relatively heavily regulated Competition authorities have only recently been given more power to address the dominant position of conglomerates The remote geographic location and small absolute size of the Chilean market provide limited incentives for foreign companies to enter entrenched local markets 25 Copyright 2011 Professor Michael E. Porter

26 Administrative Infrastructure Chile gets high overall marks on government efficiency Compared to peers especially outside of Latin America, however, entrepreneurs face significant administrative costs 26 Copyright 2011 Professor Michael E. Porter

27 Doing Business Selected Countries Economy Ease of Doing Business Rank Registering Property Paying Taxes Starting a Business Dealing with Construction Permits Protecting Investors Trading Across Borders Getting Credit Closing a Business Enforcing Contracts Mexico Peru Colombia Chile Brazil Argentina Note: Rank out of 183 countries index omits Employing Workers metric Source: World Bank Doing Business (2011). 27 Copyright 2011 Professor Michael E. Porter

28 Administrative Infrastructure Chile gets high overall marks on government efficiency Compared to peers especially outside of Latin America, however, entrepreneurs face significant administrative costs Chile is facing a difficult transition from a model with limited government towards a model with more government that needs to be effective This challenge will only rise as the country gets more prosperous 28 Copyright 2011 Professor Michael E. Porter

29 Skills and Education On many traditional indicators of education Chile ranks broadly in line with peers but below its rank on other dimensions of competitiveness Resources available for education Educational achievement of students University rankings GCR survey responses are much more negative about the education system Education reform has been a key issue for Chile; while some progress has been made, more needs to happen Programs to increase availability of finance for students to study in Chile and at leading universities abroad Programs to established standards and raise quality Workforce skills are surprisingly absent from the education debate 29 Copyright 2011 Professor Michael E. Porter

30 Innovative Capacity Innovation policies have been dramatically revamped over recent years E.g., creation of the National Innovation Council (CNIC), the Inter- Ministerial Committee on Innovation (ICI), and the National Innovation Fund for Competitiveness (FIC) E.g., launch of the R&D tax credit While it will take some more time to fully evaluate the impact of these changes, some challenges appear to persist Too much focus on research-driven activities instead of transfer and adaptation of global knowledge Too much bureaucracy around funding programs Too much focus on increasing supply of R&D versus creating demand for innovation-based products and services 30 Copyright 2011 Professor Michael E. Porter

31 Private Sector R&D Activity Source: OECD (2011) 31 Copyright 2011 Professor Michael E. Porter

32 Houston Oil and Gas Cluster Upstream Downstream Oil & Natural Gas Exploration & Development Oil & Natural Gas Completion & Production Oil Transportation Gas Gathering Oil Trading Gas Processing Oil Refining Gas Trading Oil Distribution Gas Transmission Oil Wholesale Marketing Gas Distribution Oil Retail Marketing Gas Marketing Oilfield Services/Engineering & Contracting Firms Equipment Suppliers Specialized Technology Services Subcontractors Business Services (e.g., Oil Field Chemicals, Drilling Rigs, Drill Tools) (e.g., Drilling Consultants, Reservoir Services, Laboratory Analysis) (e.g., Surveying, Mud Logging, Maintenance Services) (e.g., MIS Services, Technology Licenses, Risk Management) Specialized Institutions (e.g., Academic Institutions, Training Centers, Industry Associations) 32 Copyright 2011 Professor Michael E. Porter

33 Massachusetts Life Sciences Cluster Health and Beauty Products Teaching and Specialized Hospitals Cluster Organizations MassMedic, MassBio, others Surgical Instruments and Suppliers Medical Equipment Dental Instruments and Suppliers Biological Products Biopharmaceutical Products Specialized Business Services Banking, Accounting, Legal Ophthalmic Goods Specialized Risk Capital VC Firms, Angel Networks Diagnostic Substances Containers Research Organizations Specialized Research Service Providers Laboratory, Clinical Testing Analytical Instruments Cluster Educational Institutions Harvard, MIT, Tufts, Boston University, UMass 33 Copyright 2011 Professor Michael E. Porter

34 Strong Clusters Drive Regional Performace Specialization in strong clusters Job growth Breadth of industries within each cluster Strength in related clusters Higher wages Higher patenting rates Presence of a region s clusters in neighboring regions Greater new business formation, growth and survival Source: Porter/Stern/Delgado (2010), Porter (2003) 34 Copyright 2011 Professor Michael E. Porter

35 Chile's World Export Market Share, % National Cluster Export Portfolio Chile, Change In Chile's Overall World Export Share: 0.144% 1.0% Agricultural Products 0.8% Transportation and Logistics Fishing and Fishing Products (0.56%, 3.49%) Forest Products (0.49%, 1.51%) 0.6% Furniture (-0.21%) 0.4% Communications Services (--0.24%) 0.2% Motor Driven Products Biopharmaceuticals Hospitality and Tourism Heavy Machinery Automotive Jewelry, Precious Metals and Collectibles Marine Equipment Processed Food Chemical Products Plastics Oil and Gas Products Production Technology Financial Services Business Services Building Fixtures and Equipment Change in Chile's World Export Market Share, 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. Metal Mining and Manufacturing (1.68%, 3.71%) Chile's Overall World Export Share: 0.443% Absolute value of exports Increasing exports Decreasing exports 0.0% -0.02% 0.03% 0.08% 0.13% 0.18% 0.23% 0.28% Exports of US$850 Million = 35 Copyright 2011 Professor Michael E. Porter

36 Chile's World Export Market Share, 2009 Chile Metal Mining and Manufacturing, Specialization by Subcluster 1.4% 1.2% Copper (33.94%) Other Metals (0.89%) 1.0% Wire and Springs 0.8% 0.6% Nonferrous Metal Processing Iron and Steel 0.4% 0.2% Primary Metal Products Fasteners Iron and Steel Products Cleaning Equipment Cutlery Pumps Fabricated Metal Products Precision Metal Products Change in Chile's World Export Market Share, 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. Absolute value of exports Increasing exports Decreasing exports 0.0% -0.05% 0.05% 0.15% 0.25% 0.35% 0.45% 0.55% Exports of US$173 Million = 36 Copyright 2011 Professor Michael E. Porter

37 Chile's World Export Market Share, 2009 Chile Agricultural Products Cluster, Specialization by Subcluster 2.5% Crude Fertilizers Change In Chile's Share of World Agricultural Products Exports : 0.23% Vegetables and Fruits Wine (1.75%, 5.49% ) 2.0% Specialty Agricultural Products 1.5% Chile's Share of World Agricultural Products Exports : 1.15% Fertilizers 1.0% Meat and Related Products 0.5% Coffee, Tea, Cocoa and Spices Feeding Materials Grains Plants and Flowers Sugars, Molasses and Honey Oils and Fats Change in Chile's World Export Market Share, 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. Absolute value of exports Increasing exports Decreasing exports 0.0% -0.5% -0.3% -0.1% 0.1% 0.3% 0.5% Exports of US$430 Million = 37 Copyright 2011 Professor Michael E. Porter

38 Current Chilean Approach to Cluster Mobilization Analytical process to identify the most promising clusters for cluster mobilization; selection of initial five clusters ( ) Mining Aquaculture Food products Specialty tourism Offshoring of business services Program structure too focused on government picking clusters vs. competitive process to mobilize efforts Limited success in broadening efforts beyond existing strengths Solid management capacity and clear impact assessment within cluster efforts still evolving 38 Copyright 2011 Professor Michael E. Porter

39 Improving Company Sophistication Chile's Relative Position 2010 Competitive Advantages Relative to Competitiveness Rank (change since 2005) Competitive Disadvantages Relative to Competitiveness Rank (change since 2005) Breadth of international markets 9 ( 3) Nature of competitive advantage 64 ( 4) Extent of incentive compensation 16 ( 11) Willingness to delegate authority 56 ( 23) Extent of marketing 27 ( 3) Capacity for innovation 55 ( 16) Reliance on professional management 28 ( 2) Company spending on R&D 52 ( 9) Degree of customer orientation 45 ( 7) Extent of regional sales 45 ( 5) Extent of staff training 42 ( 11) Value chain breadth 40 ( 25) Prevalence of foreign technology licensing 38 ( 11) Firm-level technology absorption 36 ( 4) Production process sophistication 35 ( 7) Control of international distribution 34 ( 8) Note: Rank versus 117 countries; overall, Chile ranks 48 th in 2010 PPP adjusted GDP per capita and 28 th in Overall Competitiveness Source: Institute for Strategy and Competitiveness, Harvard University (2010), based in part on survey data from the World Economic Forum. 39 Copyright 2011 Professor Michael E. Porter

40 Firm Innovation Source: OECD (2011) 40 Copyright 2011 Professor Michael E. Porter

41 Chile s Competitiveness Profile 2010 Country Competitiveness (Rank: 29) Macroeconomic Competitiveness (25) Microeconomic Competitiveness (30) Political Institutions (21) Macroeconomic Policy (33) National Business Environment (30) Company Operations and Strategy (36) Rule of Law (24) Factor Conditions (39) Demand Conditions (33) Human Development (52) Related and Supporting Industries (35) Context for Strategy and Rivalry (19) Significant disadvantage Moderate disadvantage Neutral Moderate advantage Significant advantage Note: Rank versus 139 countries; overall, Chile ranks 50 h in 2010 PPP adjusted GDP per capita and 29 th in Overall Competitiveness Source: Institute for Strategy and Competitiveness, Harvard University (2010), based in part on survey data from the World Economic Forum. 41 Copyright 2011 Professor Michael E. Porter

42 Towards an Action Agenda for Chile Reduce administrative and regulatory costs Set robust policies to enhance intensity of rivalry on Chilean markets FTAs, regional integration, approach to FDI attraction, competition policy Remove unnecessary costs of doing business and entry Tackle labor market inflexibility Mount a comprehensive workforce skills development program Better align innovation policies with the current needs of the Chilean economy 42 Copyright 2011 Professor Michael E. Porter

43 Innovation Policy DEVELOPING ECONOMIES ADVANCED ECONOMIES Assimilate Adopt foreign technology Policy priorities Inward FDI Vocational training Technology transfer institutions Enhance Modify and improve foreign technology Policy priorities Inward FDI University education Applied research organizations Cluster development Create Create new knowledge, products, and services Policy priorities Inward and outward FDI Advanced university education, especially in science and technology Scientific research organizations Cluster deepening 43 Copyright 2011 Professor Michael E. Porter

44 Towards an Action Agenda for Chile Reduce administrative and regulatory costs Set robust policies to enhance intensity of rivalry on Chilean markets FTAs, regional integration, approach to FDI attraction, competition policy Remove unnecessary costs of doing business and entry Tackle labor market inflexibility Mount a comprehensive workforce skills development program Better align innovation policies with the current needs of the Chilean economy Develop a comprehensive strategy for regional development 44 Copyright 2011 Professor Michael E. Porter

45 Regions and Competitiveness Economic performance varies significantly across sub-national regions (e.g., provinces, states, metropolitan areas) Many essential levers of competitiveness reside at the regional level Regions specialize in different sets of clusters Cluster strength directly impacts regional performance Each region needs its own distinctive competitiveness strategy and action agenda Improving competitiveness requires effective policy collaboration between regions and the national government Decentralization is important to foster regional specialization, internal competition, and greater government accountability Effective decentralization requires clarity on roles and responsibilities, and sufficient administrative capacity at local and regional level 45 Copyright 2011 Professor Michael E. Porter

46 Real GDP per capita, PPP-adjusted, 2007 $25,000 Regional Prosperity Differences Chilean Regions Chilean Average $20,000 Antofagasta $15,000 $10,000 Chilean Average: $8,604 Atacama Tarapacá Magallanes RM Metropolitan $5,000 Aysén O Higgins Maule Araucanía Bío-Bío Valparaíso Los Lagos Coquimbo $0 Source: OECD Chile CAON v Low OECD Competitiveness Index, 2003 High 46 Copyright 2011 Professor Michael E. Porter

47 Specialization of Regional Economies Leading Clusters by U.S. Economic Area, 2008 Denver, CO Business Services Medical Devices Entertainment Oil and Gas Products and Services Seattle, WA Aerospace Vehicles and Defense Information Technology Entertainment Fishing and Fishing Products Chicago, IL-IN-WI Metal Manufacturing Lighting and Electrical Equipment Production Technology Plastics Pittsburgh, PA Education and Knowledge Creation Metal Manufacturing Chemical Products Power Generation and Transmission Boston, MA-NH Analytical Instruments Education and Knowledge Creation Medical Devices Financial Services San Jose-San Francisco, CA Business Services Information Technology Agricultural Products Communications Equipment Biopharmaceuticals New York, NY-NJ-CT-PA Financial Services Biopharmaceuticals Jewelry and Precious Metals Publishing and Printing Los Angeles, CA Entertainment Apparel Distribution Services Hospitality and Tourism Raleigh-Durham, NC Education and Knowledge Creation Biopharmaceuticals Communications Equipment Textiles San Diego, CA Medical Devices Analytical Instruments Hospitality and Tourism Education and Knowledge Creation Dallas Aerospace Vehicles and Defense Oil and Gas Products and Services Information Technology Transportation and Logistics Houston, TX Oil and Gas Products and Services Chemical Products Heavy Construction Services Transportation and Logistics Atlanta, GA Transportation and Logistics Textiles Motor Driven Products Construction Materials Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. 47 Copyright 2011 Professor Michael E. Porter

48 Towards an Action Agenda for Chile Reduce administrative and regulatory costs Set robust policies to enhance intensity of rivalry on Chilean markets FTAs, regional integration, approach to FDI attraction, competition policy Remove unnecessary costs of doing business and entry Tackle labor market inflexibility Mount a comprehensive workforce skills development program Better align innovation policies with the current needs of the Chilean economy Develop a comprehensive strategy for regional development Broaden the approach to cluster mobilization 48 Copyright 2011 Professor Michael E. Porter

49 Clusters as a Tool For Economic Policy A forum for collaboration between the private sector, trade associations, government, educational, and research institutions Brings together firms of all sizes, including SME s Creates a mechanism for constructive business-government dialog A tool to identify problems and action recommendations A vehicle for investments that strengthen multiple firms/institutions simultaneously Fosters greater competition rather than distorting the market 49 Copyright 2011 Professor Michael E. Porter

50 Aligning Economic Policy and Clusters Business Attraction Education and Workforce Training Export Promotion Natural Resource Protection Clusters Science and Technology Infrastructure (e.g., centers, university departments, technology transfer) Standard setting Specialized Physical Infrastructure Environmental improvement Clusters provide a framework for organizing the implementation of many public policies and public investments to achieve greater effectiveness 50 Copyright 2011 Professor Michael E. Porter

51 Cluster Linkages and Economic Diversification Fishing & Fishing Products Agricultural Products Hospitality & Tourism Prefabricated Enclosures Textiles Jewelry & Precious Metals Footwear Business Services Financial Services Apparel Processed Food Leather & Related Products Distribution Services Publishing & Printing Oil & Gas Transportation & Logistics Education & Knowledge Creation Chemical Products Biopharmaceuticals Plastics Information Tech. Medical Devices Entertainment Analytical Instruments Tobacco Aerospace Vehicles & Defense Communications Equipment Lightning & Electrical Equipment Building Fixtures, Equipment & Services Power Generation Motor Driven Products Furniture Aerospace Engines Heavy Construction Services Heavy Machinery Construction Materials Forest Products Production Technology Mining & Metal Manufacturing Sporting & Recreation Goods Automotive Note: Clusters with overlapping borders or identical shading have at least 20% overlap (by number of industries) in both directions. 51 Copyright 2011 Professor Michael E. Porter

52 Jewelry & Precious Metals Footwear Cluster Linkages and Economic Diversification Business Services Financial Services Apparel Processed Food Leather & Related Products Fishing & Fishing Products Agricultural Products Distribution Services Publishing & Printing Oil & Gas Transportation & Logistics Education & Knowledge Creation Chemical Products Plastics Hospitality & Tourism Information Tech. Biopharmaceuticals LQ, or Location Quotient, measures the country s share in cluster exports relative to its overall share of world exports. An Chile LQ CAON > 1 v10 indicates Mon afternoon an above prepared average by RA Stacie export Rabinowitz share in a cluster. Chile, 1999 Medical Devices Entertainment Analytical Instruments Tobacco Aerospace Vehicles & Defense Communications Equipment Lightning & Electrical Equipment Prefabricated Enclosures LQ > 4 LQ > 2 LQ > 1 Building Fixtures, Equipment & Services Power Generation Motor Driven Products Furniture Aerospace Engines Heavy Construction Services Heavy Machinery Textiles Construction Materials Forest Products Production Technology Mining & Metal Manufacturing Sporting & Recreation Goods Automotive 52 Copyright 2011 Professor Michael E. Porter

53 Jewelry & Precious Metals Footwear Cluster Linkages and Economic Diversification Business Services Financial Services Apparel Processed Food Leather & Related Products Fishing & Fishing Products Agricultural Products Distribution Services Publishing & Printing Oil & Gas Transportation & Logistics Education & Knowledge Creation Chemical Products Plastics Hospitality & Tourism Information Tech. Biopharmaceuticals LQ, or Location Quotient, measures the country s share in cluster exports relative to its overall share of world exports. An Chile LQ CAON > 1 v10 indicates Mon afternoon an above prepared average by RA Stacie export Rabinowitz share in a cluster. Chile, 2009 Medical Devices Entertainment Analytical Instruments Tobacco Aerospace Vehicles & Defense Communications Equipment Lightning & Electrical Equipment Prefabricated Enclosures LQ > 4 LQ > 2 LQ > 1 Building Fixtures, Equipment & Services Power Generation Motor Driven Products Furniture Aerospace Engines Heavy Construction Services Heavy Machinery Textiles Construction Materials Forest Products Production Technology Mining & Metal Manufacturing Sporting & Recreation Goods Automotive 53 Copyright 2011 Professor Michael E. Porter

54 Clusters and Economic Diversification Upgrade the sophistication of existing export products and services Attract multinationals to anchor new clusters Grow new industries within existing clusters Grow related clusters 54 Copyright 2011 Professor Michael E. Porter

55 The Role of Government in Cluster Initiatives Government should Government may Government should not Support all existing and emerging clusters Participate Enable data collection and dissemination at the cluster level Be ready to implement recommendations Initiate/ Convene Co-Finance Pick favored clusters Pick favored companies Subsidize or distort competition Define cluster action priorities 55 Copyright 2011 Professor Michael E. Porter

56 Towards an Action Agenda for Chile Reduce administrative and regulatory costs Set robust policies to enhance intensity of rivalry on Chilean markets FTAs, regional integration, approach to FDI attraction, competition policy Remove unnecessary costs of doing business and entry Tackle labor market inflexibility Mount a comprehensive workforce skills development program Better align innovation policies with the current needs of the Chilean economy Develop a comprehensive strategy for regional development Broaden the approach to cluster mobilization Deepen integration with neighboring countries 56 Copyright 2011 Professor Michael E. Porter

57 Geographic Influences on Competitiveness World Economy Broad Economic Areas Groups of Neighboring Nations Nation States, Provinces Cities and Metropolitan Areas 57 Copyright 2011 Professor Michael E. Porter

58 Competitiveness and the Neighborhood Opening trade and investment among neighbors Expands the available market A nation s neighbors are its most natural trading and investment partners The natural path of internationalization for local firms is the neighborhood Open trade and investment make each country a more attractive location for investment Economic coordination to drive improvements in the business environment Capture synergies in policy and infrastructure Gain greater clout in international negotiations External agreements to help overcome domestic political and economic barriers to reform 58 Copyright 2011 Professor Michael E. Porter

59 Competitiveness Upgrading Among Neighbors Capturing Synergies Business Environment Macroeconomic Policy Political Institutions and Governance Factor Conditions Improving the efficiency and interconnectivity of transportation infrastructure Enhancing regional communications Creating an efficient energy network Linking financial markets Opening the movement of students for training or higher education Context for Strategy and Rivalry Eliminating trade and investment barriers within the region Simplifying and harmonizing cross-border regulations, paperwork and visas Coordinating antitrust and competition policies Demand Conditions Harmonizing environmental and energy standards Harmonizing product safety standards Establishing reciprocal consumer protection laws Opening government procurement within the region Related and Supporting Industries Facilitating cross-border cluster upgrading Coordinating macroeconomic policies Coordinated financial market rules Strong regional development bank Sharing best practices in government operations Creating regional institutions e.g., disaster relief Dispute resolution mechanisms Economic statistics Developing a regional approach with international organizations 59 Copyright 2011 Professor Michael E. Porter

60 Towards an Action Agenda for Chile Reduce administrative and regulatory costs Set robust policies to enhance intensity of rivalry on Chilean markets FTAs, regional integration, approach to FDI attraction, competition policy Remove unnecessary costs of doing business and entry Tackle labor market inflexibility Mount a comprehensive workforce skills development program Better align innovation policies with the current needs of the Chilean economy Develop a comprehensive strategy for regional development Broaden the approach to cluster mobilization Deepen integration with neighboring countries Create an overarching Chilean economic strategy 60 Copyright 2011 Professor Michael E. Porter

61 The Need for an Economic Strategy Policy Improvement Economic Strategy Implementing best practices in each policy area A prioritized agenda to create a unique competitive position for a country or region There are a huge number of policy areas that matter No country can or should try to make progress in all areas simultaneously 61 Copyright 2011 Professor Michael E. Porter

62 Creating a National Economic Strategy National Value Proposition What is the distinctive competitive position of a nation given its location, legacy, existing strengths, and potential strengths? What unique value as a business location? For what types of activities and clusters? And what roles with neighbors, the region, and the broader world? Developing Unique Strengths What elements of the business environment can be unique strengths relative to peers/neighbors? What existing and emerging clusters represent local strengths? Achieving and Maintaining Parity with Peers What weaknesses must be addressed to remove key constraints and achieve parity with peer countries? Priorities and sequencing are necessity in economic development 62 Copyright 2011 Professor Michael E. Porter

63 Tests of a National Economic Strategy Has the country articulated a distinctive position? That will create a positive identity for the country? That will inspire citizens? Does the strategy build on strengths? Are the strengths realistic versus neighbors and other peer countries? Does the strategy fit with trends in the region and the world economy? Is the strategy realistic given the country s weaknesses. Can weaknesses inconsistent with the strategy be neutralized? Are social and political reforms integrated with economic reforms and pursued simultaneously? Is there the political will and the political consensus to implement the strategy? 63 Copyright 2011 Professor Michael E. Porter

64 Tests of a National Economic Strategy Continued Do the policy priorities fit the strategy? The choice of special policies to address, and their design? The sequence in which policies are implemented? Has the strategy been communicated clearly to the stakeholders? Is the private sector engaged? Is government itself organized around the strategy? Is there an overall coordinating structure for economic development? Is the quality of governmental agencies and other institutions sufficient for effective implementation? Are there mechanisms to measure progress and review / modify the strategy as prosperity improves or conditions change? 64 Copyright 2011 Professor Michael E. Porter

65 Towards an Action Agenda for Chile Reduce administrative and regulatory costs Set robust policies to enhance intensity of rivalry on Chilean markets FTAs, regional integration, approach to FDI attraction, competition policy Remove unnecessary costs of doing business and entry Tackle labor market inflexibility Mount a comprehensive workforce skills development program Better align innovation policies with the current needs of the Chilean economy Develop a comprehensive strategy for regional development Broaden the approach to cluster mobilization Deepen integration with neighboring countries Create an overarching Chilean economic strategy Key challenge is transition to a new competitiveness paradigm 65 Copyright 2011 Professor Michael E. Porter

66 Chilean Competitiveness: Ready for the Next Stage Chilean policy makers have recognized the need to move to a new competitiveness paradigm Elements of the new paradigm Innovation-driven economy Diversification beyond natural resources Competitiveness based on more than openness and strong macroeconomic policy Success in this new era requires a fundamental shift in roles and responsibilities of the public and the private sector Chile has shifted policy priorities and created new institutions Now the challenge is to improve their effectiveness and coordination 66 Copyright 2011 Professor Michael E. Porter