Norwegian Competitiveness: Where Does the Nation Stand?

Transcription

1 Norwegian Competitiveness: Where Does the Nation Stand? Professor Michael E. Porter Institute for Strategy and Competitiveness Harvard Business School Oslo Business Summit Oslo, Norway October 22 nd, 2004 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 , (Palgrave Macmillan, 2004), 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 1 Copyright 2004 Professor Michael E. Porter

2 Norwegian Competitiveness One of the most prosperous countries in the world Recent economic performance has fallen below that of many peer countries There is no consensus on the right strategy to secure Norwegian prosperity after the oil resources have been exploited An objective assessment of Norwegian competitiveness is essential to inform a discussion about the country s future strategy 2 Copyright 2004 Professor Michael E. Porter

3 Real GDP, PPP-adjusted, 1998 = 100% 150% 140% 130% 120% 110% 100% Real GDP Development Over Time Selected OECD Countries, Sorted by CAGR, : IRELAND KOREA, REP. OF HUNGARY NEW ZEALAND CANADA AUSTRALIA SPAIN UNITED STATES FINLAND SWEDEN UNITED KINGDOM CZECH REPUBLIC FRANCE NETHERLANDS DENMARK NORWAY ITALY GERMANY JAPAN SWITZERLAND 90% Source: EIU (2004) 3 Copyright 2004 Professor Michael E. Porter

4 Comparative Economic Performance GDP per capita (PPP adjusted) in US-$, ,000 30,000 25,000 20,000 15,000 Norway Switzerland Japan Germany Portugal Denmark United States Iceland UK New Zealand Canada Finland Sweden Spain Czech Republic Slovakia Greece Hungary Ireland* South Korea 10,000 5,000 Mexico Turkey Poland 0 0% 1% 2% 3% 4% 5% 6% Compound annual growth rate of real GDP per capita, Note: Ireland s GDP is above 20% above its GNI because of large profits accruing to foreign-owned companies Source: Groningen Growth and Development Centre and The Conference Board (2004), authors calculations 4 Copyright 2004 Professor Michael E. Porter

5 Comparative Economic Performance Prosperity Without the Direct Contribution of Oil & Gas GDP per capita (PPP adjusted) in US-$, ,000 30,000 25,000 20,000 15,000 10,000 5,000 Norway* Norway Switzerland Iceland Denmark Japan UK Germany Italy Portugal Turkey Mexico United States Canada Finland Sweden Greece Czech Republic Slovakia Poland Spain New Zealand Hungary Ireland* South Korea 0-2% -1% 0% 1% 2% 3% 4% 5% 6% Compound annual growth rate of real GDP per capita, Note: Estimated performance without the direct GDP contribution of oil & gas ( mining and extraction sector ), Ireland s GNI is 20% lower than its GDP Source: Groningen Growth and Development Centre and The Conference Board (2004), Statistics Norway (2004), authors calculations 5 Copyright 2004 Professor Michael E. Porter

6 What is Competitiveness Prosperity Productivity Competitiveness Innovative Capacity Innovation is more than just scientific discovery There are no low-tech industries, only low-tech firms 6 Copyright 2004 Professor Michael E. Porter

7 Real GDP per Hour Worked 2003, $-US 70 Labor Productivity Selected Countries Norway (without the oil sector)* Finland United States Norway Denmark Germany Sweden Ireland Canada 30 UK Spain 20 Portugal Slovenia 10 Hungary Czech Republic Latvia Estonia Poland Lithuania 0-1% 0% 1% 2% 3% 4% 5% 6% 7% Growth of Real GDP per Hour, CAGR, Note: Estimated performance without the direct GDP contribution and hours worked of oil & gas ( mining and extraction sector ) Source: Groningen Growth and Development Centre and The Conference Board (2004), Statistics Norway (2004), authors calculations 7 Copyright 2004 Professor Michael E. Porter

8 Labor Force Utilization Selected Countries Annual Hours Worked per Employee, ,400 2,200 2,000 1,800 1,600 1,400 Lithuania Latvia Estonia Czech Republic Poland Slovak Republic Slovenia US Spain Japan Hungary Canada Ireland Sweden Finland Denmark Germany France UK Austria Portugal 1,200 Norway 1, % -1.5% -1.0% -0.5% 0.0% 0.5% Growth of Annual Hours Worked per Employee, CAGR, Note: About 1% of all hours worked in Norway take place in the Oil sector; subtracting the oil sector Hours worked per employee increases by 7 hours a year Source: Groningen Growth and Development Centre and The Conference Board (2004), Statistics Norway (2004), authors calculations 8 Copyright 2004 Professor Michael E. Porter

9 Domestic Cost Levels Selected European Countries Purchasing Power Parity Factor, Lower local prices relative to the United States Higher local prices relative to the United States Lithuania Slovak Republic Czech Republic Latvia Hungary Estonia Russia Poland Slovenia Spain UK United States Austria Finland Germany Norway Denmark Sweden Norway is a high cost place to live and conduct business, as are other Nordic countries Source: Groningen Growth and Development Centre and The Conference Board (2004), authors calculations 9 Copyright 2004 Professor Michael E. Porter

10 Annual U.S. patents per 1 million population, International Patenting Output OECD Countries United States Switzerland Netherlands UK France Italy Japan Germany Canada New Zealand Sweden South Korea Australia Spain Denmark Norway Hungary Finland Austria 0% 2% 4% 6% 8% 10% Compound annual growth rate of US-registered patents, Ireland (17.5%, 42) Taiwan (11.3%, 234) Singapore (28.9%, 102) = 10,000 patents granted in 2003 Norway s output of internationally significant patents is low and well below innovation leaders Source: US Patent and Trademark Office ( Author s analysis. 10 Copyright 2004 Professor Michael E. Porter

11 Effectiveness of R&D Spending US Patents in 2003 per 1 Mio. R&D Spending in 2001 (or latest available) Japan US Switzerland Germany Canada Finland S Korea New Zealand Denmark Netherlands Sweden Austria UK Belgium Ireland Italy France Australia Norway Hungary Iceland Spain Czech Rep. Slovak Rep. Portugal Poland Source: OECD, USPTO, author s calculation 11 Copyright 2004 Professor Michael E. Porter

12 World export share in % 1.4% Norway s Export Performance World Export Market Shares 1.2% 1.0% 0.8% 0.6% 0.4% All Goods Non-oil Goods Services Total 0.2% 0.0% Oil& Gas share of Goods exports % 49.4% 46.8% 54.4% 53.6% 43.2% 49.8% 63.6% 61.4% 60.1% na Source: WTO (2004), Institute for Strategy and Competitiveness (2004) 12 Copyright 2004 Professor Michael E. Porter

13 Comparative Inward Foreign Investment OECD Countries FDI Stocks as % of GDP, Average % 70% Ireland (84%, 130%) Netherlands 60% Czech Republic 50% New Zealand 40% Switzerland Sweden Denmark United Kingdom Australia Portugal Slovakia 30% Spain Canada Poland France Finland 20% Norway Mexico Germany Greece United States 10% Italy 0% 0% 10% 20% 30% 40% 50% 60% FDI Inflows as % of Gross Fixed Capital Formation, Average Source: UNCTAD (2004) 13 Copyright 2004 Professor Michael E. Porter

14 Rank Difference: FDI Performance FDI Potential, Comparative Inward Foreign Investment FDI Performance versus Potential Czech Republic Slovakia Estonia UK Spain Denmark Latvia Sweden Lithuania Poland Hungary Germany Finland Austria Norway Russia Source: UNCTAD (2004), author s analysis. 14 Copyright 2004 Professor Michael E. Porter

15 Multinational Companies Home Base Business Week 1000 United States 423 United Kingdom 73 Canada 37 Germany 35 Sweden 15 Spain 10 Finland 5 Norway 5 Denmark 4 Ireland 4 Austria 3 Portugal 3 Poland 2 Hungary 1 Rank Company Industry 172 Statoil Oil & Gas 317 Norsk Hydro Oil & Gas 410 Telenor Telecom 670 DnB NOR Finance 986 Orkla Conglomerate Note: Business Week ranks by Market Value, the three leading Norwegian companies are in majority government ownership Source: Business Week (2004), author s analysis. 15 Copyright 2004 Professor Michael E. Porter

16 Sources of Prosperity Inherited Prosperity Prosperity is derived from selling inherited natural resources or real estate Prosperity is limited by the amount of resources available, and is ultimately temporary Focus gravitates towards the distribution of wealth as interest groups seek a bigger share of the pie E.g. regions, public employees, powerful sectors Government is the central actor in the economy as the owner and distributor of wealth Resource revenues allow unproductive policies and practices to persist Created Prosperity Prosperity is derived from creating valuable products and services Prosperity is created by firms Prosperity is unlimited, based only by the innovativeness and productivity of companies in the economy Creating the conditions for productivity and innovation are the central policy question Companies are the central actors in the economy The government s role is to create the enabling conditions 16 Copyright 2004 Professor Michael E. Porter

17 Determinants of Productivity and Productivity Growth Macroeconomic, Political, Legal, and Social Context for Competitiveness Microeconomic Foundations of of Competitiveness The The Sophistication of of Company Company Operations and and Strategy Strategy The The Quality Quality of of the the Microeconomic Business Business 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 17 Copyright 2004 Professor Michael E. Porter

18 Productivity and the Business Environment Factor (Input) Conditions 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 Context for Firm Strategy and Rivalry A local context and rules that encourage investment and sustained upgrading e.g., Intellectual property protection Meritocratic incentive system across institutions Open and vigorous competition among locally based rivals Related and Supporting Industries Access to capable, locally based suppliers and firms in related fields Presence of clusters instead of isolated industries Demand Conditions Sophisticated and demanding local customer(s) Local customer needs that anticipate those elsewhere Unusual local demand in specialized segments that can be served regionally and globally 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 18 Copyright 2004 Professor Michael E. Porter

19 Clusters and Competitiveness The Houston Oil and Gas Products and Services Cluster Oil & Gas Exploration & Development Oil & 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) 19 Copyright 2004 Professor Michael E. Porter

20 Clusters and Competitiveness The Boston 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 Biopharma- ceutical 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 Educational Institutions Harvard University, MIT, Tufts University, Boston University, UMass 20 Copyright 2004 Professor Michael E. Porter

21 Institutions for Collaboration Selected Massachusetts Organizations, Life Sciences Life Sciences Industry Associations Massachusetts Biotechnology Council Massachusetts Medical Device Industry Council Massachusetts Hospital Association University Initiatives Harvard Biomedical Community MIT Enterprise Forum Biotech Club at Harvard Medical School Technology Transfer offices General Industry Associations Associated Industries of Massachusetts Greater Boston Chamber of Commerce High Tech Council of Massachusetts Informal networks Company alumni groups Venture capital community University alumni groups Economic Development Initiatives Massachusetts Technology Collaborative Mass Biomedical Initiatives Mass Development Massachusetts Alliance for Economic Development Joint Research Initiatives New England Healthcare Institute Whitehead Institute For Biomedical Research Center for Integration of Medicine and Innovative Technology (CIMIT) 21 Copyright 2004 Professor Michael E. Porter

22 Global Competitiveness Report 2004 The Relationship Between Business Competitiveness and GDP Per Capita 35,000 Norway United States 2003 GDP per Capita (Purchasing Power Adjusted) 30,000 25,000 20,000 15,000 10,000 5,000 0 Bosnia Paraguay Bolivia Ethiopia Italy Greece Cyprus Malta Portugal Czech Rep Hungary Slovak Rep. Poland Argentina Croatia Uruguay Russia Mexico Bulgaria Turkey Vietnam Malawi Jamaica Ghana Kenya China Jordan Indonesia Spain Lithuania Chile Brazil Tunisia India Business Competitiveness Index Slovenia Ireland Estonia S Korea South Africa Malaysia Canada Denmark Switzerland Netherlands Belgium France UK Finland Sweden Taiwan Singapore New Zealand Israel Note: OECD countries marked in blue Source: Global Competitiveness Report Copyright 2004 Professor Michael E. Porter

23 Business Competitiveness Index Over- and Underperformance Gap between actual and predicted GDP per capita, % of actual GDP per capita, % Upside potential Vulnerability 40% 20% 0% -20% -40% -60% Latvia Finland Sweden Estonia Germany UK Lithuania Denmark Poland Spain Norway (removing oil) Russia Norway Source: GCR (2004), Institute for Strategy and Competitiveness, author s analysis. 23 Copyright 2004 Professor Michael E. Porter

24 Country Rank 5 Business and Growth Competitiveness Index Norway s Position over Time Business Competitiveness Index Rank Growth Competitiveness Index Rank Note: Constant sample of countries Source: Global Competitiveness Report Copyright 2004 Professor Michael E. Porter

25 Norway s Relative Position 2003 Company Operations and Strategy Competitive Advantages Relative to GDP per Capita Country Ranking, Arrows indicate a change of 5 or more ranks since 1998 Willingness to delegate authority 6 Extent of staff training 10 Reliance on professional management 11 Production process sophistication 13 Extent of marketing 18 Competitive Disadvantages Relative to GDP per Capita Country Ranking, Arrows indicate a change of 5 or more ranks since 1998 Value chain presence 50 Extent of regional sales 42 Breadth of international markets 40 Extent of incentive compensation 38 Extent of branding 34 Note: Rank by countries; overall Norway ranks 20 (23 on Company Operations and Strategy, 2 on GDP pc 2003) Source: Global Competitiveness Report Copyright 2004 Professor Michael E. Porter

26 Private Sector R&D Investments Private Sector R&D Expenditure as % of GDP, 2001 or latest 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Sweden Finland United States Germany Denmark UK Austria Norway Slovenia Ireland Czech Republic Spain Slovak Republic Hungary Portugal Estonia Poland Lithuania Latvia Source: European Commission (2004) 26 Copyright 2004 Professor Michael E. Porter

27 Innovation Performance Top Norwegian Organizations in Terms of U.S. Patents Company NYCOMED IMAGING AS NORSK HYDRO STATOIL TANDBERG DATA A/S ALVERN NORWAY A/S ALCATEL KVERNELAND KLEPP AS SINVENT AS ERICSSON NORWAY BAKER HUGHES INC. ELKEM ASA PETROLEUM GEO-SERVICES A/S KVAERNER MARITIME AS WEATHERFORD/LAMB, INC. ABB OFFSHORE TECHNOLOGY AS AXIS BIOCHEMICALS AS BOREALIS HOLDING A/S GECO A.S. KVAERNER ASA U.S. Patents, Rank Among Patentors from the Baltic Sea Region* Note: Baltic Sea Region includes Nordic countries, Baltic countries, Northwestern Russia, Northern Poland, and Northern Germany Source: USPTO (2004), author s analysis 27 Copyright 2004 Professor Michael E. Porter

28 Company Operations and Strategy Key Observations Norwegian companies have strengths in employing modern management techniques and staff training However, they have limited presence in the value chain relative to peers While Norwegian companies employ a relatively high share of researchers, they fall behind other Nordic countries on R&D spending and international patenting Norway is home to few internationally active companies Norwegian companies lag in terms of breadth of international positions 28 Copyright 2004 Professor Michael E. Porter

29 The Norwegian Business Environment Factor (Input) Conditions + Efficient public sector services and good legal system + Strong communication and IT infrastructure ~ Physical infrastructure and financial markets are comparable to peers ~ Education and skills are generally strong but with emerging weaknesses Context for Firm Strategy and Rivalry + Low levels of corruption and strong domestic competition laws + Relatively flexible labor markets and good labor relations ~ Taxation high but below top levels of neighboring countries - Low level of rivalry in many markets, especially from foreign companies - Limited openness to international competition - Significant government presence in business Related and Supporting Industries Demand Conditions + Advanced regulations on IT and environmental quality - Local demand sophistication from the private and public sector falls behind peer countries Key clusters are oil & gas, maritime, fishing products, and telecom/it; narrow position in light metals (aluminum) - Low scores on the overall cluster strength 29 Copyright 2004 Professor Michael E. Porter

30 Norwegian Business Environment Core Strengths Factor Conditions Country Ranking, Arrows indicate a change of 5 or more ranks since 1998 Extent of bureaucratic red tape 3 Efficiency of legal framework 4 Judicial independence 4 Cell phones per 100 people (2003) 8 Telephone/fax infrastructure quality 11 Internet users per 10,000 people (2003) 11 Context for Firm Strategy and Rivalry Country Ranking, Arrows indicate a change of 5 or more ranks since 1998 Independence of decisions by government 1 officials Protection of minority shareholders 4 interests Business costs of corruption 5 Intellectual property protection 7 Effectiveness of anti-trust policy 7 Effectiveness of bankruptcy law 10 Cooperation in labor-employer relations 10 Hidden trade barrier liberalization 14 Note: Rank by countries; overall Norway ranks 20 (14 on National Business Environment, 2 on GDP pc 2003) Source: Global Competitiveness Report Copyright 2004 Professor Michael E. Porter

31 Norwegian Business Environment Misleading Perceptions of Strengths In some areas presumed to be Norwegian strengths, the country is either not significantly different from competing locations or shows signs of emerging weakness Education and skills There is a high ratio of scientists and engineers in the workforce and a high share of labor market entrants with secondary education However, the share of graduates in science and technology is low and declining, test scores in assessments of educational attainment are only average despite high expenditures, and companies voice concerns about the quality of math & science education Infrastructure Overall infrastructure quality is only on par or even below peers, especially in terms of rail and air transport infrastructure Financial markets There is ample availability of debt capital but low level of financial market sophistication and limited equity market access 31 Copyright 2004 Professor Michael E. Porter

32 Norwegian Human Resources Average of Reading, Scientific, and Mathematical Literacy Average Educational Attainment, OECD average Japan Korea Finland United Kingdom Ireland Austria Sweden Belgium France Switzerland Norway Czech Republic United States Denmark Hungary Germany Spain Poland Italy Russian Federation Portugal Greece Latvia 400 Source: OECD PISA-Study (2003), author s calculation 32 Copyright 2004 Professor Michael E. Porter

33 Norwegian Business Environment Misleading Perceptions of Weakness Other areas of the business environment which are presumed, at least abroad, to be Norwegian weaknesses are actually not major disadvantages versus competing locations Labor market regulations While Norway has some regulatory barriers to hiring, it is rated as more flexible in terms of firing employees than many of other locations Taxation While the overall tax burden on Norwegian is high, its incentive effects are rated as less negative than in many other European countries 33 Copyright 2004 Professor Michael E. Porter

34 Context for Strategy and Rivalry Labor Market Flexibility* 80 Less flexible More flexible UK Austria Denmark Hungary Norway Czech Republic Ireland Sweden Lithuania Poland Slovenia Latvia Germany Spain Finland Slovak Republic Russia Portugal Note: Score for the flexibility of regulations on labor contract termination Source: World Bank (2004), author s analysis. 34 Copyright 2004 Professor Michael E. Porter

35 Context for Strategy and Rivalry Taxation System Positive Incentive Effect Complexity Norway Hong Kong SAR Singapore Iceland Estonia Slovak Republic Taiwan Ireland Malaysia Switzerland United States United Kingdom Netherlands New Zealand Portugal Austria Latvia Canada Japan Lithuania Slovenia Australia Denmark Finland Germany France Italy Poland Sweden Georgia Ukraine Brazil Belgium Negative Source: Global Competitiveness Report Copyright 2004 Professor Michael E. Porter

36 Norway s Relative Position Context for Firm Strategy and Rivalry Competitive Disadvantages Relative to GDP per Capita Country Ranking, Arrows indicate a change of 5 or more ranks since 1998 Foreign ownership restrictions 46 Centralization of economic policy-making 31 Intensity of local competition 28 Tariff liberalization 26 Decentralization of corporate activity 25 Efficacy of corporate boards 22 Regulation of securities exchanges 19 Prevalence of mergers and acquisitions 16 Extent of locally based competitors 16 Note: Rank by countries; overall Norway ranks 20 (14 on National Business Environment, 2 on GDP pc 2003) Source: Global Competitiveness Report Copyright 2004 Professor Michael E. Porter

37 Government Role in the Economy Relative Size of the Public Enterprise Sector France Austria Czech Republic Finland Italy Greece Germany Belgium Korea Netherlands Sweden Canada Denmark Portugal UK Switzerland New Zealand US Japan Australia Highest Lowest 37 Copyright 2004 Professor Michael E. Porter Poland Norway Turkey Source: OECD (2004)

38 New Zealand Sweden Netherlands Austria Denmark Germany Canada Japan Spain Finland Portugal Switzerland Belgium France Norway Italy Greece 38 Copyright 2004 Professor Michael E. Porter US High Intensity of Regulation in Product Markets Low Regulation of Product Markets Selected OECD Countries UK Ireland Australia Source: Nicoletti/Scarpetta (2001)

39 Demand Conditions Norway s Relative Position Demand Conditions Competitive Advantages Relative to GDP per Capita Country Ranking, Arrows indicate a change of 5 or more ranks since 1998 Laws relating to ICT 2 Stringency of environmental regulations 8 Competitive Disadvantages Relative to GDP per Capita Country Ranking, Arrows indicate a change of 5 or more ranks since 1998 Government procurement of advanced 25 technology products Presence of demanding regulatory 18 standards Sophistication of local buyers' products 18 and processes Buyer sophistication 17 Note: Rank by countries; overall Norway ranks 20 (14 on National Business Environment, 2 on GDP pc 2003) Source: Global Competitiveness Report Copyright 2004 Professor Michael E. Porter

40 Related and Supporting Industries Norway s Relative Position Related and Supporting Industries Competitive Advantages Relative to GDP per Capita Competitive Disadvantages Relative to GDP per Capita Country Ranking, Arrows indicate a change of 5 or more ranks since 1998 Local availability of components and parts 36 Local supplier quantity 31 Local availability of process machinery 26 Local supplier quality 25 Extent of collaboration among clusters 24 State of cluster development 22 Local availability of specialized research 18 and training services Note: Rank by countries; overall Norway ranks 20 (14 on National Business Environment, 2 on GDP pc 2003) Source: Global Competitiveness Report Copyright 2004 Professor Michael E. Porter

41 Norwegian Cluster Portfolio Goods Exports, % Change in Norwegian World Export Market Share, : +0.05% Fish & Fishing Products 6% Oil & Gas Marine Equipment (2.9%, -4.5%) 3% 0% Metal Manufacturing Aerospace Vehicles and Defense -0.8% -0.3% 0.2% 0.7% 1.2% Compound annual growth rate of Norwegian-world export market share, Norwegian World Export Market Share, 2002: 1.05% Source: UNCTAD Trade Data. Author s analysis. 41 Copyright 2004 Professor Michael E. Porter

42 Norwegian Business Environment Core Weaknesses Rivalry The extent of competitive pressure in many Norwegian markets is low Foreign companies face barriers and limited incentives to enter the Norwegian market Government continues to have a major role in the Norwegian economy, crowding out private investment Clusters Despite strong positions in a few clusters which outperform the economy as a whole, the overall level of cluster development is low Norwegian regional policy and barriers to foreign investors have worked against cluster development Demand Conditions Despite advanced regulations in IT and environmental quality, Norwegian demand conditions lag peer countries in stimulating innovation 42 Copyright 2004 Professor Michael E. Porter

43 Norwegian Competitiveness Key Observations Norway s high level of current prosperity masks serious weaknesses in important economic performance indicators The fundamental competitiveness of Norway lags peer countries and is insufficient to support even the current level of prosperity Norway s competitiveness has deteriorated over recent years It is too early to say whether the latest reforms signal a trend change Key weaknesses exist in the following areas, among others Companies have insufficient presence on foreign markets and fail to compete on innovation There is little effective rivalry, especially from foreign companies Government is overly involved in business, limiting private initiative and investment Clusters are mostly weak, which hurts productivity and dynamism The quality of the education system, physical infrastructure, and the financial system are insufficient to attain the level of productivity and innovation needed to support current prosperity Demand conditions retard innovation There is not a clear consensus that Norway has a problem, much yet on new directions for change 43 Copyright 2004 Professor Michael E. Porter

44 Back-Up 44 Copyright 2004 Professor Michael E. Porter

45 The Norwegian Oil Sector Size* of Norway s Oil Sector 55% of Norwegian exports (2002) 50% of U.S. patents by major Norwegian institutions ( ) $40 $35 $30 Crude Oil, World market price 42% of the growth in nominal GDP between 1998 and 2003 came from the oil & gas sector 60% of the growth in the oil & gas sector resulted from the increase in the world market price of oil 20% of Norwegian GDP (2003) $25 $20 $15 $10 $5 $0 1% of Norwegian employment (2002) Note: Narrow definition of the Mining and Extraction Sector as well as unprocessed gas and oil exports Source: Statistics Norway (2004), WTO (2004), Institute for Strategy and Competitiveness (2004), USPTO (2004), IOGA (2004), author s analysis 45 Copyright 2004 Professor Michael E. Porter

46 Norwegian Competitiveness: Towards An Action Agenda Professor Michael E. Porter Institute for Strategy and Competitiveness Harvard Business School Oslo Business Summit Oslo, Norway October 22 nd, 2004 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 , (Palgrave Macmillan, 2004), 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 1 Copyright 2004 Professor Michael E. Porter

47 Norway s Competitiveness Agenda Address key barriers to productivity and innovation in the Norwegian business environment Competition Internationalization Financial markets Innovative capacity Embrace a cluster-based approach to economic development Modify the strategy for regional and rural development Shift the roles of government, business, and other institutions in economic development 2 Copyright 2004 Professor Michael E. Porter

48 Address Weaknesses in the Norwegian Business Environment Competition Address the adverse impact of government ownership on competition and productivity To overcome the disadvantages of a small market outside of the EU, government policy needs to be even more aggressive in creating a pro-competitive context Strengthening the Competition Act alone will not be enough At the minimum, Norway must be completely open to international competition 3 Copyright 2004 Professor Michael E. Porter

49 Address Weaknesses in the Norwegian Business Environment Internationalization Reduce tariff and non-tariff barriers to imports Change the impression that foreign companies are not welcomed as owners in Norway E.g. limit interventions and public statements that oppose foreign company investments and acquisitions in Norway Improve attractiveness of Norway for foreign entrepreneurs, managers, investors, and researchers E.g. review and address barriers in taxation, work permits, and other regulations 4 Copyright 2004 Professor Michael E. Porter

50 Address Weaknesses in the Norwegian Business Environment Financial Markets Upgrade the quality of financial market regulation, including transparency and the rights of minority owners Aggressively open the market to leading foreign financial services firms Manage government capital invested in the domestic market to stimulate greater sophistication and competition Government as a demanding customer E.g. create competition among domestic and foreign funds for the administration of government equity funds 5 Copyright 2004 Professor Michael E. Porter

51 Address Weaknesses in the Norwegian Business Environment Innovative Capacity Norway s Competitiveness Rank: Innovative Capacity Index Scientists & Engineers Index Linkages Index Innovation Policy Index Operations & Strategy Index Cluster Environment Index Source: Global Competitiveness Report Copyright 2004 Professor Michael E. Porter

52 Norwegian Innovation Policy Recent Initiatives A new innovation policy was launched in late 2003 Driven by a cross-ministerial group led by the Department of Industry and Trade Six key action areas were defined: General conditions for trade and industry Knowledge and competence Research, development, and commercialization Entrepreneurship Electronic and physical infrastructure New administrative structures to define innovation policy Key agencies in the Norwegian innovation system are being restructured Reorganization of the Norwegian Research Council in September 2003 to create three instead of six divisions: Science, Innovation, and Strategic Efforts Creation of Innovation Norway in January 2004 replacing the Norwegian Tourist Board, the Norwegian Trade Council, the Norwegian Industrial and Regional Development Fund (SND), and the Government Consultative Office for Inventors (SVO) Creation of an Innovation Council with members from private and the public sector under the leadership of the Minister for Trade and Industry These initiatives are positive The critical task will be to deliver on their potential 7 Copyright 2004 Professor Michael E. Porter

53 Norwegian Innovation Policy Recent Initiatives (Continued) Change of the intellectual property rights regime to encourage patenting of academic research Creation of Centers of Excellence in scientific research R&D tax credit scheme (SkatteFUNN) extended to larger businesses Launch of government-financed seed capital funds, operated by the cities of Oslo, Bergen, and Trondheim It is critically important that the seed capital funds are operated by private operators, selected in open competition The innovation policy also needs to have a strong focus on entrepreneurship, including university programs, business plan contests, etc. 8 Copyright 2004 Professor Michael E. Porter

54 Norway s Competitiveness Agenda Address key barriers to productivity and innovation in the Norwegian business environment Embrace a cluster-based approach to economic development Modify the strategy for regional and rural development Shift the roles of government, business, and other institutions in economic development 9 Copyright 2004 Professor Michael E. Porter

55 The Boston 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 Biopharma- ceutical 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 Educational Institutions Harvard University, MIT, Tufts University, Boston University, UMass 10 Copyright 2004 Professor Michael E. Porter

56 Clusters and Competitiveness Clusters Increase Productivity / Efficiency Efficient access to specialized inputs, services, employees, information, institutions, and public goods (e.g. training programs) Ease of coordination and transactions across firms Rapid diffusion of best practices Ongoing, visible performance comparisons and strong incentives to improve vs. local rivals Clusters Stimulate and Enable Innovations Enhanced ability to perceive innovation opportunities Presence of multiple suppliers and institutions to assist in knowledge creation Ease of experimentation given locally available resources Clusters Facilitate Commercialization Opportunities for new companies and new lines of established business are more apparent Commercializing new products and starting new companies is easier because of available skills, suppliers, etc. Clusters reflect the fundamental influence of externalities / linkages across firms and associated institutions in competition

57 Specialization of Regional Economies Select U.S. Geographic Areas Seattle-Bellevue- Everett, WA Aerospace Vehicles and Defense Fishing and Fishing Products Analytical Instruments Denver, CO CO Chicago Leather and Sporting Goods Communications Equipment Oil Oil and Gas Processed Food Aerospace Vehicles and Defense Heavy Machinery Wichita, KS KS Pittsburgh, PA PA Aerospace Vehicles and Construction Materials Defense Metal Manufacturing Heavy Machinery Education and Knowledge Oil Oil and Gas Creation Boston Analytical Instruments Education and Knowledge Creation Communications Equipment San Francisco- Oakland-San Jose Bay Area Communications Equipment Agricultural Products Information Technology Raleigh-Durham, NC NC Communications Equipment Information Technology Education and Knowledge Creation Los Angeles Area Apparel Building Fixtures, Equipment and Services Entertainment San Diego Leather and Sporting Goods Power Generation Education and Knowledge Creation Houston Heavy Construction Services Oil Oil and Gas Aerospace Vehicles and Defense Atlanta, GA GA Construction Materials Transportation and Logistics 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 12 Copyright 2004 Professor Michael E. Porter

58 Determinants of Regional Prosperity Cluster Strength and Wage Levels, U.S. Regions Average Regional Wage, 2001 $55,000 $45,000 New York, NY Boston, MA Bay Area, CA $35,000 $25,000 y = x R 2 = $15, Share of Traded Employment in Strong Clusters (LQ >.8), Broad Cluster, 2001 Source: County Business Patterns; Michael E. Porter, The Economic Performance of Regions, Regional Studies, Vol. 37, Copyright 2004 Professor Michael E. Porter

59 Determinants of Regional Prosperity Change in Cluster Specialization and Wage Growth, U.S. States Annual Regional Wage Growth Rate, % 5.0% y = x R 2 = P-value =.0001 WA DC 4.5% CT MN NJ GA OR CA DE NC TX 4.0% KS RI IL FL ND WI KY PA SC IA AR MO 3.5% AL IN NV MT WY ID LA 3.0% OK AK 2.5% Economy WV HI Economy becoming less becoming more 2.0% specialized specialized Change of Cluster Employment GINI, NY VA MA CO Source: County Business Patterns; Michael E. Porter, The Economic Performance of Regions, Regional Studies, Vol. 37, Copyright 2004 Professor Michael E. Porter

60 Role of Clusters in Economic Development Clusters are critical engines of economic development Clusters are especially important for fostering innovation Clusters are a forum to identify important challenges in the business environment Clusters provide an opportunity for government, companies, and other institutions to work constructively together and learn new roles in economic development Clusters need to be a core element of any competitiveness effort 15 Copyright 2004 Professor Michael E. Porter

61 The Australian Wine Cluster Trade Performance Australian Wine Exports in million US Dollars $1,200 Australian Wine World Export Market Share 5% $1,000 4% $800 $600 $400 $200 3% 2% 1% Value Market Share $ % Source: UN Trade Statistics 16 Copyright 2004 Professor Michael E. Porter

62 The Australian Wine Cluster History 1930 First oenology course at Roseworthy Agricultural College 1955 Australian Wine Research Institute founded 1965 Australian Wine Bureau established 1970 Winemaking school at Charles Sturt University founded 1980 Australian Wine and Brandy Corporation established 1990 Winemaker s Federation of Australia established 1991 to 1998 New organizations created for education, research, market information, and export promotions 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, Copyright 2004 Professor Michael E. Porter

63 Industrial Policy versus Cluster-Based Policy Industrial Policy Targets areas of perceived market demand or attractive technology Intervenes in competition (subsidies, protection, etc.) Favors domestic companies Requires sustained financial commitment by the public sector Centralizes decisions at the national level Has a high failure rate; short term impact but low sustainability Cluster-Based Policy Leverages existing assets, history, and geographic location All clusters are good Enables competition to be more sophisticated Neutral on ownership Requires sustained participation by all actors Encourage initiative at all geographic levels Has increasing impact over time; some quick returns are possible Distort and impede competition Enhance and upgrade competition 18 Copyright 2004 Professor Michael E. Porter

64 Public / Private Cooperation in Cluster Upgrading Minnesota s Medical Device Cluster Context for Firm Strategy and Rivalry Factor (Input) Conditions Aggressive trade associations (Medical Alley Association, High Tech Council) Effective global marketing of the cluster and of Minnesota as the The Great State of Health Full-time Health Care Industry Specialist in the department of Trade and Economic Development Demand Conditions Joint development of vocationaltechnical college curricula with the medical device industry Minnesota Project Outreach exposes businesses to resources available at university and state government agencies Active medical technology licensing through University of Minnesota State-formed Greater Minnesota Corp. to finance applied research, invest in new products, and assist in technology transfer Related and Supporting Industries State sanctioned reimbursement policies to enable easier adoption and reimbursement for innovative products 19 Copyright 2004 Professor Michael E. Porter

65 Upgrading Competitiveness A Two-Pronged Approach General Business Environment Upgrading Cluster Mobilization Improves the economic platform for clusters Makes clusters stronger drivers of growth Identifies business environment weaknesses Enables new dialogue between private and public sectors 20 Copyright 2004 Professor Michael E. Porter

66 Norway s Competitiveness Agenda Address key barriers to productivity and innovation in the Norwegian business environment Embrace a cluster-based approach to economic development Modify the strategy for regional and rural development Shift the roles of government, business, and other institutions in economic development 21 Copyright 2004 Professor Michael E. Porter

67 Regional Policy in Norway While supporting peripheral regions is a legitimate political goal, Norway has gone about it the wrong way Norway has for years followed an active policy of subsidizing residents and economic activity in peripheral regions Financial incentives to locate in distant regions work against cluster formation, limit efficient regional specialization, and undermine competitiveness Regional policy needs to enable communities to take responsibility for their own economic destiny leveraging their own unique strengths This requires accountable regional authorities with real political decision rights 22 Copyright 2004 Professor Michael E. Porter

68 Rural Regional Economies in the United States The economic performance of U.S. rural regions is lagging metropolitan regions, despite significant efforts to enhance economic developments However, the performance of rural regions is extremely heterogeneous and overall better than the perception Virtually all observers in the U.S. agree that there is a clear need to rethink the policy for rural regions Selected Recommendations of a Recent Research Report: Rural economic development should focus on the unique strengths of each area, rather than concentrating on ameliorating generic weaknesses Rural areas will never match urban infrastructure, services, and amenities The appropriate economic unit for strategy purposes must include not only rural areas but also adjacent urban centers Rural economic development should address and harness the efficient spatial distribution of economic activity rather than attempt to replicate urban economies The central government needs to provide rural regions with the necessary tools and financing mechanisms to develop and execute an effective strategy Source: Michael E. Porter, Christian Ketels, Kaia Miller, Rich Bryden, Competitiveness in Rural U.S. Regions, EDA, Washington, D.C Copyright 2004 Professor Michael E. Porter

69 Norway s Competitiveness Agenda Address key barriers to productivity and innovation in the Norwegian business environment Embrace a cluster-based approach to economic development Modify the strategy for regional and rural development Shift the roles of government, business, and other institutions in economic development 24 Copyright 2004 Professor Michael E. Porter

70 Shifting Responsibilities for Economic Development Old Model New Model Government drives economic development through policy decisions and incentives Economic development is a collaborative process involving government at multiple levels, companies, teaching and research institutions, and institutions for collaboration 25 Copyright 2004 Professor Michael E. Porter

71 Roles of Government in Economic Development Government inevitably plays an important role in shaping the business environment in which companies operate A general discussion of more or less government is misguided Government needs to be active in improving the quality of the business environment while reducing activities that limit competition or otherwise hurt competitiveness 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 26 Copyright 2004 Professor Michael E. Porter

72 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 27 Copyright 2004 Professor Michael E. Porter

73 Norway s Competitiveness Agenda Address key barriers to productivity and innovation in the Norwegian business environment Competition Internationalization Financial markets Innovative Capacity Embrace a cluster-based approach to economic development Modify the strategy for regional and rural development Shift the roles of government, business, and other institutions in economic development Creating the microeconomic foundations for a prosperous Norway in the post-natural resource era 28 Copyright 2004 Professor Michael E. Porter