Portuguese Competitiveness - Harvard Business School [PDF]

Portuguese Competitiveness

Professor Michael E. Porter Institute for Strategy and Competitiveness Harvard Business School Novos Desafiois da Competitividade Lisbon, Portugal April 17th, 2002

This presentation draws on ideas from Professor Porter’s articles and books, in particular, The Competitive Advantage of Nations (The Free Press, 1990), “The Microeconomic Foundations of Economic Development,” in The Global Competitiveness Report 2001/02, (World Economic Forum, 1998), “Clusters and the New Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 1998), ongoing statistical study of clusters, and “What is Strategy?” (Harvard Business Review, Nov/Dec 1996). For further information please check the Institute’s web site at www.isc.hbs.edu. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form1or by any means - electronic, mechanical, photocopying, recording, or otherwise - without the permission of Michael E. Porter. CAON Portugal 04-17-02 CK

1

Copyright © 2002 Professor Michael E. Porter

Portuguese Economic Strategy 1995 to 2001 •

Secure entry to the European Monetary Union

•

Reduce public sector deficits

•

Bring down inflation

•

Adopt the required European Union regulations

•

As of 2001, all these goals were achieved

•

The sustainability of Portugal’s economic growth is uncertain

•

A new national economic strategy will be necessary

CAON Portugal 04-17-02 CK

2


Sources of Prosperity •

A nation’s standard of living (wealth) is determined by the productivity with which it uses its human, capital, and natural resources. The appropriate definition of competitiveness is productivity. –

Productivity depends both on the value of products and services (e.g. uniqueness, quality) as well as the efficiency with which they are produced.

–

It is not what industries a nation competes in that matters for prosperity, but how firms compete in those industries

–

Productivity in a nation is a reflection of what both domestic and foreign firms choose to do in that location. The location of ownership is secondary for national prosperity.

–

The productivity of “local” industries is of fundamental importance to competitiveness, not just that of traded industries

–

Devaluation does not make a country more “competitive”

•

Nations compete in offering the most productive environment for business

•

The public and private sectors play different but interrelated roles in creating a productive economy


3


Determinants of Productivity and Productivity Growth Macroeconomic, Macroeconomic,Political, Political,Social, Social,and andLegal Legal Context Contextfor forDevelopment Development

Microeconomic MicroeconomicFoundations Foundationsof ofDevelopment Development Sophistication Sophistication of ofCompany Company Operations Operationsand and Strategy Strategy

Quality Qualityof ofthe the Microeconomic Microeconomic Business Business Environment Environment

• A sound macroeconomic, political, social, and legal 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 competition CAON Portugal 04-17-02 CK

4


Innovation and Prosperity Prosperity Prosperity

Productivity Productivity

“Competitiveness”

Innovative Innovative Capacity Capacity


!

Innovation is more than just scientific discovery

!

There are no low-tech industries, only low-tech firms 5


Productivity and the Microeconomic Business Environment Context Context for for Firm Firm Strategy Strategy and andRivalry Rivalry

Factor Factor (Input) (Input) Conditions Conditions

• A local context that encourages efficiency, investment, and sustained upgrading • Open and vigorous competition among locally based rivals

Demand Demand Conditions Conditions

• High quality, specialized • Sophisticated and demanding inputs available to firms: local customer(s) - human resources • Unusual local demand in Related specialized segments that can Related and and - capital resources Supporting be served globally Supporting - physical infrastructure Industries Industries • Customer needs that anticipate - administrative infrastructure those elsewhere - information infrastructure • Presence of capable, locally-based - scientific and technological suppliers and firms in related fields infrastructure • Presence of clusters instead of isolated - natural resources industries


• The microeconomic business environment consist of the array of assets, information, rules, policies, and institutions surrounding competition 6 Copyright © 2002 Professor Michael E. Porter

The California Wine Cluster Grapestock Grapestock

Fertilizer, Fertilizer, Pesticides, Pesticides, Herbicides Herbicides

State Government Agencies (e.g., Select Committee on Wine Production and Economy)

Winemaking WinemakingEquipment Equipment

Barrels Barrels

Bottles Bottles

Caps Caps and and Corks Corks

Grape Grape Harvesting Harvesting Equipment Equipment

Labels Labels Irrigation Irrigation Technology Technology

Growers/Vineyards Growers/Vineyards

Wineries/Processing Wineries/Processing Facilities Facilities

Public Public Relations Relationsand and Advertising Advertising Specialized SpecializedPublications Publications (e.g., (e.g.,Wine WineSpectator, Spectator,Trade Trade Journal) Journal)

California California Agricultural Agricultural Cluster Cluster

Educational, Educational, Research, Research, && Trade Trade Organizations (e.g. Organizations (e.g.Wine Wine Institute, Institute, UC UCDavis, Davis,Culinary CulinaryInstitutes) Institutes)

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. CAON Portugal 04-17-02 CK

7

Tourism Tourism Cluster Cluster

Food Food Cluster Cluster 7 Copyright © 2002 Professor Michael E. Porter

Agenda • Portugal’s economic performance • Portugal’s competitiveness


8


Relative Economic Performance Level and Growth Rate of GDP per Capita, 1990-2000 14% 25,000

GDP per Capita, 2000 1990-1995 1995-2000

12%

$25,000

10% 20,000

$20,000

8%

15,000 6%

$15,000

4% 10,000

$10,000

2%

5,000 0%

$5,000

Hungary Slovenia

Greece

S Korea

Portugal

Spain

New Zealand

Israel

Taiwan

0 Source: EIU CAON Portugal 04-17-02 CK

9


Portugal Economic Performance Annual Catch-Up Rates to US GDP per Capita Levels, 1970-1999 Level of GDP per Capita relative to the US, Beginning of Period

60%

1995-1999 50%

1990-1995 1980-1990 1970-1980

40%

30%

1950-1970 20%

10%

0% 0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Portuguese GDP per capita Growth above US Growth Source: OECD CAON Portugal 04-17-02 CK

10


Macroeconomic Imbalances Portugal % of GDP

8 6 Private Sector Saving Public Sector Saving

4 2 0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 -2 -4 -6 -8 -10 Note: The drop in private sector saving since 1995 is in roughly equal parts driven by households decreasing savings and companies increasing debts Source: OECD CAON Portugal 04-17-02 CK

11


Comparative Economic Performance EU Structural and Cohesion Funds for Portugal % of GDP

% of Gross Fixed Capital Formation 16%

3.4%

14%

3.3%

12%

3.2%

10%

3.1%

1989-93 8%

1994-99 3.0%

1989-93 1994-99 2000-06e

2000-06e 6%

2.9%

4%

2.8%

2%

2.7%

0%

Source: European Commission CAON Portugal 04-17-02 CK

12


Comparative Economic Performance Productivity Growth in Manufacturing, Selected Countries 12% 1991-1995 10%

1996-2000

8% 6% 4% 2% 0%

Fr an ce Sp ai n Po rtu ga l

Ita ly

Ire la nd Fi nla nd Au st ria Sw ed Un en itd St at es Be lg iu m G re ec e G er Un m ite an d y Ki ng Ne dom th er la nd s D en m ar k

-2%

Note: Sorted by overall productivity growth 1991-2000 Source: European Commission CAON Portugal 04-17-02 CK

13


Comparative Innovation Performance Selected Countries and European Union EU Patents per million people, 1997-99 average

120

116.5

119.4

France

EU-15

100

80 59.7 60

40 18.5

20 2.7

6.2

0

Portugal

Greece

Spain

Italy


14


Portuguese Economic Performance 1995 to 2001

Performance • Solid economic growth • Very slow productivity growth • Extremely low innovation rates

• No microeconomic competitiveness strategy • Sustainability of macroeconomic policies in question


15


Portugal’s Competitive Position in 2002

•

Easy catch-up period is over

•

Reduction of EU structural funds is likely

•

Ability to use devaluation to prop up “competitiveness” is gone

•

Eastern European countries with lower wages are about to enter EU market

•

What is the new economic strategy to deal with this environment?


16


Agenda • Portugal’s economic performance • Portugal’s competitiveness


17


Portuguese Diamond in 1994 Findings from “The Competitiveness of Portugal”-study Context Context for for Firm Firm Strategy Strategy and andRivalry Rivalry


• Goals discourage upgrading • Strategies do not emphasize upgrading and exporting


• Lack of skilled workforce and • Relatively management unsophisticated local consumer and industrial • Low level of R&D demand • High energy costs Related Related and and • Inefficient capital markets Supporting Supporting • Infrastructure still lagging Industries Industries despite some recent improvements • Significant regional clusters • Insufficient linkages • Lack of strong related and supported industries Source: Monitor Company CAON Portugal 04-17-02 CK Copyright © 2002 Professor Michael E. Porter even in most 18significant clusters


Factor (Input) Conditions Portugal’s Relative Position

Competitive Advantages Relative to GDP per Capita

Competitive Disadvantages Relative to GDP per Capita

Country Ranking

Country Ranking

Road Infrastructure Quality

18

Quality of Math and Science Education

56

Ease of Access to Loans

19

Availability of Scientists and Engineers

50

Local Equity Market Access

23

Port Infrastructure Quality

45

Availability and Cost of Cellular Phones

23

Quality of Scientific Research Inst.

41

Financial Market Sophistication

24

Administrative Burden for Start-Ups

41

Venture Capital Availability

24

Quality of Public Schools

40

Police Protection of Businesses

25

Railroad Infrastructure Quality

40

Speed and Cost of Internet Access

25

Air Transport Infrastructure Quality

39

Extent of Bureaucratic Red Tape

39

University/Industry R&D Collaboration

38

Patents per Capita (2000)

37

Quality of Management Schools

36

Adequacy of Private Sector Legal Recourse 34

Note: Rank by countries; overall Portugal ranks 31 (29 on Quality of the National Business Environment) Source: Global Competitiveness Report 2001 CAON Portugal 04-17-02 CK

19


Educational Attainment Southern European Countries and Regions Share of 25-59 year old by level of educational attainment

100% 10% 90%

21%

22%

18%

10% 22% 12%

80% 36%

70%

16%

33% 60%

43%

42%

50% 40%

78%

High Medium Low

62%

30%

54%

49% 20%

36%

37%

EU-15

France

10% 0%

Greece

Italy

Spain

Portugal


20


Context Contextfor forFirm Firm Strategy Strategy and andRivalry Rivalry

Context for Firm Strategy and Rivalry Portugal’s Relative Position


Competitive Disadvantages Relative to GDP per Capita

Country Ranking

Country Ranking

Intellectual Property Protection

23

Efficacy of Corporate Boards

53

Hidden Trade Barrier Liberalization

24

51

Tariff Liberalization

24

Extent of Distortive Government Subsidies Decentralization of Corporate Activity

47

Cooperation in Labor-Employer Relations

40

Extent of Locally Based Competitors

36

Intensity of Local Competition

33

Effectiveness of Anti-Trust Policy

30


21


Investments in Research & Development Private Sector R&D Expenditure Share of GDP, 1999

3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5%

al Po rtu g

ai n Sp

ly Ita

st ria Au

la nd Ire

lg i

um

s Be

er la nd

om N

d U

ni te

et h

Ki n

gd

ar k en m

ce D

Fr an

y m an

d

G er

an

St a d

ni te U

Fi nl

te s

n pa Ja

Sw ed en

0.0%

Source: OECD CAON Portugal 04-17-02 CK

22


Difficulty of Business Formation Selected OECD Countries Cost of Business Formation relative to GDP per capita

60% 50% 40% 30% 20% 10%

K U

S U

d an Fi nl

Sw ed en

n

m an y G er

Ja pa

ai n Sp

ce Fr an

ly Ita

er la nd s

al N

et h

rtu g Po

Au st ria

G re

ec e

0%

Source: Freeman (2001) CAON Portugal 04-17-02 CK

23



Demand Conditions Portugal’s Relative Position


Competitive Disadvantages Relative to GDP per Capita Country Ranking

Government Procurement of Advanced Technology Products

31

Stringency of Environmental Regulations

28

Presence of Demanding Regulatory Standards

28

Laws Relating to Information Technology

28

Buyer Sophistication

27

Consumer Adoption of Latest Products

26


24


Related Relatedand and Supporting Supporting Industries Industries

Related and Supporting Industries Portugal’s Relative Position


Competitive Disadvantages Relative to GDP per Capita Country Ranking

Local Availability of Process Machinery

42

Local Supplier Quality

41

Local Availability of Specialized Research 41 and Training Services Local Availability of Information Technology Services

41

Extent of Product and Process Collaboration

38

Local Availability of Components and Parts

34

Local Supplier Quantity

31

State of Cluster Development

29


25


Portuguese Diamond in 2002 Context Context for for Firm Firm Strategy Strategy and andRivalry Rivalry


• Lack of skilled workforce and management • Low level of scientific and technological infrastructure • Infrastructure still lagging despite some recent improvements

• Administrative barriers to business formation • Lack of local rivalry • Low level of private R&D expenditure

Related Related and and Supporting Supporting Industries Industries


• Relatively unsophisticated local consumer and industrial demand

• Significant regional clusters • Insufficient linkages within clusters • Lack of strong related and supported industries even in most significant clusters CAON Portugal 04-17-02 CK

26


Portuguese Clusters Footwear

Cluster institutions (APPICAPS, APIC, CTC)

Casual shoes Dress shoes

Leather

Leather belts

Leather clothing

Leather Footwear Manufacturers

Leather handbags

Leather

Leather gloves Textiles and fashion Clusters

Government

Footwear machinery

Machinery suppliers

Processed leather

Leather Cluster

Shoe design

Local software developers

Marketing and distribution

International distributors

Branding

International brands

Universities and R&D institutions

Source: Research by HBS MBA students M Abecasis, E Cernoia, M Pita, and S Morais CAON Portugal 04-17-02 CK

27


Portuguese Clusters Footwear •

Cluster analyzed in the 1994 study – Concentrated around Porto – Competing on price and low wage – Low productivity, poor relations to suppliers, low level of product differentiation, and limited understanding of consumer needs

•

Situation in 2002 – Increasing competition from low cost locations in Asia – Moderate improvements in productivity, response times, and technical efficiency – Still poor relations to related and supporting industries – Active cluster organization APICCAPS; recently launched “Portugal Quality Shoes” re-branding initiative – In a contracting world shoe market, Portuguese export market share has slightly increased to 6.1% between 1995 and 1999

•

Progress suggests potential of cluster development in Portugal • No concerted commitment across the country

Note: Draws on research by HBS MBA students M Abecasis, E Cernoia, M Pita, and S Morais CAON Portugal 04-17-02 CK

28


Portuguese Competitiveness 1994 versus 2002 • Portugal has made important progress on macroeconomic terms • Progress on the microeconomic foundations of competitiveness has been largely absent – There are exceptions (E.g., reduction of government subsidies, privatizations, creation of a more independent anti-trust authority) – The exceptions were more a by-product of adopting EU rules than part of a competitiveness strategy

• Portugal must address its microeconomic weaknesses if it is to improve or even sustain its prosperity


29


Portugal in 2002 The Need for a New Strategy •

The central challenge is microeconomic

•

Portugal’s new strategy must focus on competitiveness and productivity – A long-term program to upgrade the business environment – A long-term program to build innovative capacity

•

Aggressive cluster development throughout the economy must become a national priority

•

Leaders must create a national economic vision to inspire and motivate the Portuguese people


30
