Competitiveness For The Third Millennium: Implications For .

Competitiveness for the Third Millennium:Implications for MexicoProfessor Michael E. PorterHarvard Business SchoolCEO Agenda ForumMonterrey, MexicoOctober 6, 2009This presentation draws on ideas from Professor Porter’s books and articles, in particular, Competitive Strategy (The Free Press, 1980); CompetitiveAdvantage (The Free Press, 1985); “What is Strategy?” (Harvard Business Review, Nov/Dec 1996); “Strategy and the Internet” (Harvard BusinessReview, March 2001); and a forthcoming book. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form orby any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Michael E. Porter. Additional information maybe found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu. Version: October 5, 2009, 4pm20091006 – Monterray Mexico.ppt1Copyright 2009 Professor Michael E. Porter

Prosperity PerformancePPP-adjusted GDP perCapita, 2008 ( USD) 30,000Selected Lower and Middle Income CountriesSloveniaGreece ( 30,650)UAEIsraelNew Zealand 25,000BahrainMaltaSouth KoreaCzech RepublicCyprusOmanSaudi ArabiaPortugalLatin American countriesOther countriesSlovakiaEstoniaHungary 20,000LithuaniaTrinidad & TobagoLatviaPolandCroatiaLibya laysiaTurkeySouth AfricaLebanon Costa RicaBrazilColombiaMacedoniaBelizeAlgeria 10,000EcuadorGuatemalaParaguayEl SalvadorNicaragua aKazakhstanDominican GeorgiaSri LankaIndiaVietnam 02%Source: EIU (2009),20091006 –calculationsMonterray Mexico.pptauthors4%6%8%10%Growth of Real GDP per Capita (PPP-adjusted), CAGR, 1999-2008212%Copyright 2009 Professor Michael E. Porter

Mexico’s Exports By Type of IndustryExcluding Oil and Gas ClusterWorld Export MarketShare (current USD)Processed GoodsSemi-processed GoodsUnprocessed 07Source: UNComTrade, WTO (2008)20091006 – Monterray Mexico.ppt3Copyright 2009 Professor Michael E. Porter

Inbound Foreign Investment PerformanceFlows, Selected CountriesInward FDI Flows,% of GDPRanked by InwardFDI Flows (% ofGDP), 1993199520091006 UNCTAD,– Monterray Mexico.pptSource:World Investment Report (2009)1997199920014200320052007Copyright 2009 Professor Michael E. Porter

Innovative CapacityInnovation Output of Selected CountriesAverage U.S. patents per 1million population, 2004-2008Hungary5Malaysia4CyprusCzech Republic3CroatiaKuwaitSouth uadorPhilippines-10%Source: USPTO (2008), EIU (2008)20091006 – Monterray 20%Saudi ArabiaUAEBulgariaChinaIndiaTurkey10%20%30%CAGR of US-registered patents, 2004 – 2008540%50%60%120 patents Copyright 2009 Professor Michael E. Porter

The Mexican Economy in 2009 Despite significant reforms, Mexico has experienced slow prosperitygrowth over the last several years The global economic crisis is exposing underlying weaknesses Mexico must aggressively address its serious competitivenesschallenges to realize its full growth potential– Waiting for a United States recovery is insufficient Mexico must reinvent itself– Adopt and implement an ambitious economic strategy which builds onthe country’s unique competitive advantages20091006 – Monterray Mexico.ppt6Copyright 2009 Professor Michael E. Porter

What is Competitiveness? Competitiveness depends on the productivity with which a nation usesits human, capital, and natural resources.– Productivity sets the sustainable standard of living (wages, returns oncapital, returns on natural resources)– It is not what industries a nation competes in that matters for prosperity, buthow productively it competes in those industries– Productivity in a national economy arises from a combination of domesticand foreign firms– The productivity of “local” or domestic industries is fundamental tocompetitiveness, not just that of export industries Only competitive businesses can create wealth and jobs Nations compete to offer the most productive environment for business The public and private sectors play different but interrelated roles increating a productive economy20091006 – Monterray Mexico.ppt7Copyright 2009 Professor Michael E. Porter

Determinants of CompetitivenessMicroeconomic CompetitivenessQuality of theNationalBusinessEnvironmentState of ClusterDevelopmentSophisticationof CompanyOperations andStrategyMacroeconomic CompetitivenessSocialInfrastructureand PoliticalInstitutionsMacroeconomicPoliciesNatural Endowments Macroeconomic competitiveness creates the potential for high productivity, but is notsufficient Productivity ultimately depends on improving the microeconomic capability of theeconomy and the sophistication of local competition20091006 – Monterray Mexico.ppt8Copyright 2009 Professor Michael E. Porter

Mexico’s Macroeconomic Competitiveness Some progress has been made in implementing important reforms duringthe past twenty years, such as political and economic liberalization, openingof the economy, and economic diversification Mexico’s macroeconomic policy has been successful in some areas,such as low inflation and low interest rates– However, fiscal resources are overly dependent on oil revenues and there is anarrow tax-base– Distortive system of taxes and subsidies is limiting competitiveness Mexico lags behind OECD countries on human development indicators ineducation and health Mexico’s political and governmental institutions have improved, butremain a significant weakness There is a serious lack of trust in politicians and the effectiveness inlegislative bodies Fighting organized crime is major government challenge and priority While better than regional peers, corruption is limiting Mexico’s economicdevelopment20091006 – Monterray Mexico.ppt9Copyright 2009 Professor Michael E. Porter

Governance IndicatorsSelected CountriesBestcountry inthe worldVoice and AccountabilityPolitical StabilityGovernment EffectivenessRegulatory QualityRule of LawControl of edStadaanaCUWorstcountry inthe worldtesIndex ofGovernanceQuality,2008Note: Sorted left to right by decreasing average value across all indicators. The ‘zero’ horizontal line corresponds to the median country’s average value across all indicators.Source: World Bank (2009)20091006 – Monterray Mexico.ppt10Copyright 2009 Professor Michael E. Porter

Corruption Perception Index, 20071New wayCanadaUKHong Kong AustriaGermanyIrelandJapanUnited iaTaiwanCzech RepublicHungarySouth KoreaMalaysiaItalySouth keyCroatiaEl coDeterioratingLowcorruptionIsraelRank GuatemalaZimbabwe91PakistanRussiaEcuadorCote 05101520Change in Rank, Global Corruption Report, 2007 versus 2001Note:Ranks only countries available in both years (91 countries total)20091006 t, 200711Copyright 2009 Professor Michael E. Porter

Mexico’s Macroeconomic CompetitivenessAction Priorities Build public support to continue the fight against organized crime– A safe environment for business is a necessary condition forcompetitiveness Intensify the fight against corruption Broaden the tax base and improve tax-collection capacity Tackle the system of state subsidies Upgrade the quality of basic education and health Reduce reliance on the U.S. through diversification of tradingpartners Reform political and governmental institutions to allow moreeffective policy20091006 – Monterray Mexico.ppt12Copyright 2009 Professor Michael E. Porter

Microeconomic Competitiveness: Quality of theBusiness ategyandandRivalryRivalry – e.g. salaries, incentives forcapital investments, intellectualproperty protection, corporategovernance tions orous local competition– Openness to foreign competition– Competition lawsAccess to high quality businessinputsNatural endowmentsHuman resourcesCapital availabilityPhysical infrastructureAdministrative and informationinfrastructure (e.g. registration,permitting, transparency)– Scientific and technologicalinfrastructureLocal rules and incentives thatencourage investment andproductivity Sophistication of local customersand triesIndustries – e.g., Strict quality, safety, andenvironmental standards– Consumer protection lawsAvailability of suppliers and supportingindustries Many things matter for competitiveness Successful economic development is a process of successive upgrading, in which thebusiness environment improves to enable increasingly sophisticated ways of competing20091006 – Monterray Mexico.ppt13Copyright 2009 Professor Michael E. Porter

or (Input) ConditionsMexico's Relative Position 2009Competitive AdvantagesRelative to GDP per CapitaSoundness of banksCompetitive DisadvantagesRelative to GDP per Capita35Quality of domestic transport networkbusiness44Financial market sophistication52Overall quality of the education system52Mexico’s GDP per capita rankis 51 versus 128 countriesQuality of math and science educationEase of starting a new businessQuality of the educational systemBurden of government regulationDomestic credit to private sectorBurden of customs proceduresQuality of electricity supplyFinancing through local equity marketAvailability of scientists and engineersQuality of port infrastructureMobile subscribers per 100 populationInternet access in schoolsTime required to start a businessRegulation of securities exchangesVenture capital availabilityUtility patents per million populationProcedures required to start a businessTertiary enrollmentEase of access to loansQuality of railroad infrastructureProtection of minority shareholders’ 727070Change up/down of morethan 10 ranks since 2008Note:Rank versus 128 countries; overall, Mexico ranks 51st in 2008 PPP adjusted GDP per capita and 58th in Global Competitiveness14and Competitiveness, Harvard University (2009)20091006Mexico.pptSource:– MonterrayInstitutefor StrategyCopyright 2009 Professor Michael E. Porter

RivalryRivalryContext for Strategy and RivalryMexico’s Relative Position 2009Competitive AdvantagesRelative to GDP per CapitaCompetitive DisadvantagesRelative to GDP per CapitaOpenness of foreign ownership22FDI and technology transfer27Strength of investor protection31Prevalence of trade barriers49Mexico’s GDP per capita rankis 51 versus 128 countriesExtent of market dominance by businessgroupsQuality of competition in the ISP sectorEfficacy of corporate boardsRigidity of employmentDistortive effect of taxes and subsidieson competitionIntensity of local competitionPay and productivityMarket disruption from state-ownedenterprisesImpact of taxation on incentives to workand investEffectiveness of antitrust policyTariff rateIntellectual property protectionStrength of auditing and reporting standardsCooperation in labor-employer relationsRegulatory qualityBusiness impact of rules on FDI1171141061021009796969187797770635751Change up/down of morethan 10 ranks since 2008Note:Rank versus 128 countries; overall, Mexico ranks 51st in 2008 PPP adjusted GDP per capita and 58th in Global Competitiveness15Source:– MonterrayInstitutefor Strategy and Competitiveness, Harvard University (2009)20091006Mexico.pptCopyright 2009 Professor Michael E. Porter

Mexico’s Business EnvironmentOverall Strengths and WeaknessesSTRENGTHS WEAKNESSES Openness to FDI and technologytransferSolid basic skills and a large, young,available workforceEntrepreneurial populationGood quality of roads and domestictransport networkSound banksHigh level of sophistication in leadingMexican companies 20091006 – Monterray Mexico.ppt16Impact of crime and violence on businessHigh burden of government regulationsDistortive tax and subsidy systemLarge informal marketWeak primary and secondary educationPoor higher education and trainingsystemInsufficient graduates in science andengineeringLabor market inefficienciesSmall pool of domestic creditLimited competition, including inefficient(public and private) monopolies andoligopoliesDominance of large business groups andstate-owned enterprisesLack of innovation infrastructureWeak IP protectionCopyright 2009 Professor Michael E. Porter