American Competitiveness in a Global Economy

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1 American Competitiveness in a Global Economy Professor Michael E. Porter Harvard Business School Inner City 100 Luncheon May 20, 2009 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 2007/08 (World Economic Forum, 2007), 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 Version: May 14, pm 1 Copyright 2009 Professor Michael E. Porter

2 What is Competitiveness? Competitiveness depends on 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) It is not what industries a nation competes in that matters for prosperity, but how it competes in those industries Only business can create wealth Nations compete to offer the most productive environment for business The public and private sectors play different but interrelated roles in creating a productive economy 2 Copyright 2009 Professor Michael E. Porter

3 Competitiveness and the Business Environment Context for for Firm Strategy and and Rivalry Factor (Input) Conditions Access to high quality business inputs Human resources Physical infrastructure Capital access Administrative and information infrastructure (e.g. registration, permitting) Scientific and technological infrastructure Local rules and incentives that encourage investment and productivity e.g., Investment incentives, intellectual property protection, corporate governance standards Open and vigorous local competition e.g., Competition laws Related and 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 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 3 Copyright 2009 Professor Michael E. Porter

4 Competitiveness and Cluster Development Tourism Cluster in Cairns, Australia Public Relations & Market Research Services Travel agents Tour operators Local retail, health care, and other services Food Suppliers Property Services Restaurants Attractions and Activities e.g., theme parks, casinos, sports Local Transportation Souvenirs, Duty Free Maintenance Services Hotels Airlines, Cruise Ships Banks, Foreign Exchange Government agencies e.g. Australian Tourism Commission, Great Barrier Reef Authority Educational Institutions e.g. James Cook University, Cairns College of of TAFE Industry Groups e.g. Queensland Tourism Industry Council Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden 4 Copyright 2009 Professor Michael E. Porter

5 Enhancing Cluster Development California Wine Cluster Winemaking Equipment Grapestock Fertilizer, Pesticides, Herbicides State Government Agencies (e.g., Select Committee on Wine Production and Economy) Barrels Bottles Grape Harvesting Equipment Caps and Corks Irrigation Technology Growers/Vineyards Wineries/Processing Facilities Labels Public Relations and Advertising Specialized Publications (e.g., Wine Spectator, Trade Journal) California Agricultural Cluster Educational, Research, & Trade Organizations (e.g. Wine Institute, UC Davis, Culinary Institutes) Tourism Cluster Sources: California Wine Institute, Internet search, California State Legislature. Based on research by MBA 1997 students R. Alexander, R. Arney, N. Black, E. Frost, and A. Shivananda. Food Cluster 5 Copyright 2009 Professor Michael E. Porter

6 Globalization and U.S. Economic Performance The U.S. economy performed well over the last two decades Productivity growth was remarkably high for such a wealthy economy The U.S. accounted for one-third of all global economic growth BUT U.S. growth since 2000 was based heavily on consumption and borrowing that was unsustainable, and the economy faces a period of painful readjustment 6 Copyright 2009 Professor Michael E. Porter

7 Rising Personal Consumption in the United States US Personal Consumption Expenditure as % of GDP 73% 1970 to Present 72% 71% Average 2001 Present = 70.9% 70% 69% 68% 67% 66% Average = 66.6% 65% 64% 63% Source: Bureau of Economic Analysis (2009), analysis by Morgan Stanley 7 Copyright 2009 Professor Michael E. Porter

8 Globalization and U.S. Economic Performance The U.S. economy performed well over the last two decades Productivity growth was remarkably high for such a wealthy economy The U.S. accounted for one-third of all global economic growth BUT U.S. growth since 2000 was based heavily on consumption and borrowing that was unsustainable, and the economy faces a period of painful readjustment The value of education and skills have risen dramatically Less skilled Americans face more competition for work and restraint on wages Exacerbated by low skilled immigration There is a high rate of job churn High job creation but high job loss Future U.S. economic performance is at risk 8 Copyright 2009 Professor Michael E. Porter

10 Innovative Capacity Innovation Output of Top 25 Patent Producing Countries Average U.S. patents per 1 million population, United States 250 Japan Taiwan Switzerland Israel Finland Sweden Germany 100 Canada 50 Denmark Austria Netherlands France UK Norway Belgium Ireland Italy New Zealand 0 Brazil Spain Russia -5% 0% 5% 10% 15% 20% 25% 30% 35% CAGR of US-registered patents per 1 million population, 1997 to ,000 patents = Source: USPTO (2009), EIU (2009) Korea Singapore Australia Hong Kong India China 10 Copyright 2009 Professor Michael E. Porter

11 Strategic Position of the United States Core Strengths Entrepreneurship Innovation Institutions for higher learning Deep and efficient capital markets Free and open competition Economic decentralization 11 Copyright 2009 Professor Michael E. Porter

Specialization by Traded Clusters Selected U.S. Economic Areas, 2006 Denver, CO CO Entertainment Medical Devices Oil Oil and and Gas Gas Products and and Services Hospitality and and Tourism Seattle,

12 Specialization by Traded Clusters Selected U.S. Economic Areas, 2006 Denver, CO CO Entertainment Medical Devices Oil Oil and and Gas Gas Products and and Services Hospitality and and Tourism Seattle, WA WA Aerspoace Vehicles and and Defense Information Technology Entertainment Financial Services Chicago, IL-IN-WI Metal Metal Manufacturing Biopharmaceuticals Chemical Products Lighting and and Electrical Equipment Pittsburgh, PA PA Education and and Knowledge Creation Metal Metal Manufacturing Chemical Products Lighting and and Electrical Equipment Boston, MA-NH MA-NH Analytical Instruments Education and and Knowledge Creation Medical Devices Financial Services San San Jose-San Francisco, CA CA Business Services Agricultural Products Communications Equipment Biopharmaceuticals New New York, York, NY-NJ-CT-PA Financial Services Biopharmaceuticals Apparel Publishing and and Printing Los Los Angeles, CA CA Entertainment Apparel Distribution Services Hospitality and and Tourism Raleigh-Durham, NC NC Education and and Knowledge Creation Biopharmaceuticals Communications Equipment Motor Motor Driven Driven Products San San Diego, Diego, CA CA Analytical Instruments Hospitality and and Tourism Medical Devices Education and and Knowledge Creation Dallas Dallas Aerospace Vehicles and and Defense Oil Oil and and Gas Gas Products and and Services Information Technology Transportation and and Logistics Houston, TX TX Oil Oil and and Gas Gas Products and and Services Chemical Products Heavy Heavy Construction Services Transportation and and Logistics Atlanta, GA GA Transportation and and Logistics Textiles Construction Materials Plastics Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. 12 Copyright 2009 Professor Michael E. Porter

13 Cluster Strength in the United States versus Europe Median Share of Regional Employment in Strong Clusters 30% 25% 20% 15% 10% 5% 0% EuropeMedian Region United States Source: European Cluster Observatory 13 Copyright 2009 Professor Michael E. Porter

14 Strategic Position of the United States Core Strengths Entrepreneurship Innovation Institutions for higher learning Deep and efficient capital markets Free and open competition Economic decentralization The U.S. needs to preserve, renew and reinvest in these strengths 14 Copyright 2009 Professor Michael E. Porter

15 Strategic Position of the United States Core Strengths Entrepreneurship Innovation Institutions for higher learning Deep and efficient capital markets Free and open competition Economic decentralization Weaknesses Distortions in the international trading system Weak IP protection Restricted access to markets for services in other countries Subsidies and non-tariff barriers Unnecessary costs of doing business Regulation, litigation, and tax complexity Infrastructure bottlenecks Energy and environmental inefficiency Weak transitional security blanket Ineffective retraining system Health insurance access and mobility Pension security Human resource challenges K-12 weaknesses Access to higher education 15 Copyright 2009 Professor Michael E. Porter

16 Agenda for the United States Create an economic strategy for U.S. in collaboration with business, including small- and medium-sized businesses Renew America s innovation infrastructure Tackle America s human resource weaknesses Restructure the safety net Drive down other costs of doing business Realign federal economic programs around regions and cluster development 16 Copyright 2009 Professor Michael E. Porter

Regional Competitiveness and the Role of Business

Regional Competitiveness and the Role of Business Professor Michael E. Porter Harvard Business School Encuentro de Comisiones Regionales de Competitividad Bogotá, Colombia April 26, 2012 This presentation