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Transcript of 2010-1112 Peru CADE Porter
A Strategy for Sustaining Growth and Prosperity for PeruProfessor Michael E. Porter Harvard Business School Urubamba, Peru November 12, 2010This presentation draws on ideas from Professor Porters books and articles, in particular, Competitive Strategy (The Free Press, 1980); Competitive Advantage (The Free Press, 1985); What is Strategy? (Harvard Business Review, Nov/Dec 1996); Strategy and the Internet (Harvard Business Review, March 2001); and a forthcoming book. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwisewithout the permission of Michael E. Porter. Additional information may be found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu. Version: November 27, 20091Copyright 2010 Professor Michael E. Porter
Recent Performance of the Peruvian Economy Peru has been one of the most remarkable economic growth stories of the last decade, both compared to its own historic record and to its peers
2
Copyright 2010 Professor Michael E. Porter
Perus Prosperity PerformanceGDP per Capita (in 1990 PPP US$)
1950-2009CAGR: CAGR: - 0.73% CAGR: +4.41%
$6,000
+2.07%
$5,000
$4,000
$3,000
$2,000
$1,000
$01950 1955 1960 1965 1970 19753
1980
1985
1990
1995
2000
2005
2009
Note: PPP using Geary Khamis calculation methodology. Source: Groningen Growth and Development Centre, Total Economy Database (June 2009)
Prosperity PerformancePPP-adjusted GDP per Capita, 2009 ($USD) $ 20,000 $ 18,000 $ 16,000 $ 14,000 $ 12,000Brazil Mexico Malaysia Chile Panama Russia Argentina Uruguay
Selected Countries, 1999 to 2009
United States ($46,460) Canada ($37,840)
Trinidad & Tobago Venezuela Dominican Republic
$ 10,000 $ 8,000 $ 6,000Jamaica
Costa Rica Belize
Guatemala Colombia Thailand Ecuador
Cuba
PeruChina
El Salvador Bolivia Paraguay Nicaragua Honduras Philippines Indonesia Laos India Vietnam Cambodia
$ 4,000 $ 2,000 $0 0% 2%
Haiti
4%
6%
8%
10%
12%
14%
Growth of Real GDP per Capita (PPP-adjusted), CAGR, 1999 to 2009Source: EIU (2010), authors calculations4
Recent Performance of the Peruvian Economy Peru has been one of the most remarkable economic growth stories of the last decade, both compared to its own historic record and to its peers Sound macroeconomic policies since the mid 1990s, trade opening and a supportive international economic environment have allowed the country to prosper
5
Copyright 2010 Professor Michael E. Porter
Export IntensityExports as % GDP, 2009 80%Trinidad & Tobago
Selected Countries
70%
Panama
Thailand Vietnam
60%Belize
50%Honduras Costa Rica Cambodia Chile
Paraguay
40%
Bolivia Nicaragua
30%
Canada Russia
Jamaica
Ecuador Mexico
China Uruguay
PeruGuatemala Colombia Cuba Brazil India Argentina
20%
Dominican Republic
Indonesia
El Salvador Venezuela
10%
Haiti
USA
0% -20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
Change of Exports as Share of GDP, 1999 to 2009Source: EIU (2010)6
Recent Performance of the Peruvian Economy Peru has been one of the most remarkable economic growth stories of the last decade, both compared to its own historic record and to its peers Sound macroeconomic policies since the mid 1990s, trade opening and a supportive international economic environment have allowed the country to prosper Improvements in basic security and political stability provided an important precondition for these achievements HOWEVER Growth has been highly heterogeneous across different segments of society and different parts of the country
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Copyright 2010 Professor Michael E. Porter
Unemployment PerformanceUnemployment Rate, 2009 16%
Selected CountriesImproving DeterioratingDominican Republic Jamaica
14%
12%
Colombia India
10%Ecuador Venezuela Brazil Russia Uruguay Nicaragua Panama Trinidad & Tobago
Chile Argentina Philippines
China
United States
Peru
Canada Bolivia
8%
6%
Costa Rica Indonesia El Salvador Paraguay Vietnam Mexico
4%Honduras
Malaysia
2%
Cuba
Thailand
0% -10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
Change of Unemployment Rate in Percentage Points, 1999-2009Source: EIU (2010)8
Poverty Rates% of Population Under the Poverty Line
Peru, 2001 to 2009
60%
50%
40%
30%
20%
10%
0% 1997
1998
1999
2000
2001
2002
20039
2004
2005
2006
2007
2008
2009
Source: Informacion Socio Demografica, from El Instituto Nacional de Estadistica e Informatica (INEI), 2010
Regional Poverty RatesPeru, 2004 to 2009% of Population Under the Poverty Line
Coast
Sierra
Lowlands
70%
60%
50%
40%
30%
20%
10%
0% 2004 2005 2006 200710
2008
2009
Source: Informacion Socio Demografica, from El Instituto Nacional de Estadistica e Informatica (INEI), 2010
Recent Performance of the Peruvian Economy Peru has been one of the most remarkable economic growth stories of the last decade, both compared to its own historic record and to its peers Sound macroeconomic policies since the mid 1990s, trade opening and a supportive international economic environment have allowed the country to prosper Improvements in basic security and political stability provided an important precondition for these achievements HOWEVER Growth has been highly heterogeneous across different segments of society and different parts of the country Lack of diversification and dependence on global commodity markets for natural resources is exposing Peru to high levels of volatility
11
Copyright 2010 Professor Michael E. Porter
Exports as % GDP, 2009 140
Export Intensity and SizeSelected CountriesMalaysia
120
100
80Trinidad and Tobago
60
Panama Paraguay Costa Rica Honduras Bolivia Ecuador Uruguay El Salvador Guatemala Haiti Dominican Republic
40
Chile Mexico Argentina Canada Russia India
Peru
China
20
Venezuela, RB Indonesia Colombia
Brazil
United States
1Source: World Bank (2010)
10
10012
1,000
10,000
GDP $Billions, 2009 (log scale)
Perus Export Compositionby SITC categories 1962-2009
1962: $4 billion*Crude materials, inedible, except fuels Food and live animals
2009: $20 billion
Manufact goods classified chiefly by material Mineral fuels, lubricants and related materials Manufactured articles
Chemicals
Machinery and transport equipment Animal and vegetable oils and fats
* In 2009 dollars. Note: Showing standard SITC rev. 1 categories, goods only. 13 Source: UN Comtrade; authors analysis
Perus Exports By Type of IndustryWorld Export Market Share (current USD)
0.90% 0.80% 0.70% 0.60% 0.50% 0.40% 0.30% 0.20% 0.10% 0.00% 1997
Processed Goods Semi-processed Goods Unprocessed Goods Services TOTAL
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
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. 14
Recent Performance of the Peruvian Economy Peru has been one of the most remarkable economic growth stories of the last decade, both compared to its own historic record and to its peers Sound macroeconomic policies since the mid 1990s, trade opening and a supportive international economic environment have allowed the country to prosper Improvements in basic security and political stability provided an important precondition for these achievements HOWEVER Growth has been highly heterogeneous across different segments of society and different parts of the country Lack of diversification and dependence on global commodity markets for natural resources is exposing Peru to high levels of volatility Sustained growth will depend on broad microeconomic and institutional improvement
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Copyright 2010 Professor Michael E. Porter
Inbound Foreign InvestmentInbound FDI Stocks as % of GDP, Average 1998-2008 90%Trinidad and Tobago
Stocks and Flows, Selected Countries
80% 70% 60% 50% 40% 30% 20% 10% 0% 0%Cuba India Haiti Venezuela Ecuador Guatemala Paraguay Indonesia China Mexico Malaysia Thailand Laos Argentina Nicaragua Cambodia Vietnam Panama Jamaica Chile Bolivia Belize
Canada Honduras Costa Rica El Salvador Brazil Uruguay Dominican Republic
Russia Philippines
PeruColombia
United States
5%
10%
15%
20%
25%
30%
35%
40%
45%
FDI Inflows as % of Gross Fixed Capital Formation, Average 1998 - 2008Source: UNCTAD, World Investment Report (2009).16
Innovative CapacityAverage U.S. patents per million population, 2005 2009
Innovation Output of Selected Countries
3.5Croatia
3.0
Estonia
2.5
2.0Lithuania
South Africa
Greece
1.5
Russia
United Arab Emirates Portugal Argentina Chile Latvia Uruguay China Costa Rica
1.0Mexico
Saudi Arabia
Poland Brazil
India
0.5
Peru0.0 -30%Source: USPTO, World Bank
Ukraine Venezuela Kazakhstan Philippines Colombia Egypt Ecuador Kenya
Thailand
Turkey
-20%
-10%
0%17
10%
20%
CAGR of US-registered patents, 2005 2009
30% 40% 170 patents =
Recent Performance of the Peruvian Economy Peru has been one of the most remarkable economic growth stories of the last decade, both compared to its own historic record and to its peers Sound macroeconomic policies since the mid 1990s, trade opening and a supportive international economic environment have allowed the country to prosper Improvements in basic security and political stability provided an important precondition for these achievements HOWEVER Growth has been highly heterogeneous across different segments of society and different parts of the country Lack of diversification and dependence on global commodity markets for natural resources is exposing Peru to high levels of volatility Sustained growth will depend on broad microeconomic and institutional improvement Among the biggest challenges for the country are complacency after years of solid growth and the relatively mild impact of the global economic crisis
Sustaining economic growth of 8 to 9% is possible only if Peru can substantially improve competitiveness Peru will need an ambitious economic and social strategy, building on the countrys unique competitive advantages18Copyright 2010 Professor Michael E. Porter
The Need for a Peruvian Economic Strategy
Strategy means focus: Peru can not improve everything at the same time but need to prioritize the most pressing issues Strategy means choice: Peru can not be good at everything but needs to define how existing strengths are to be deepened and broadened to provide specific value to businesses Strategy means action: Peru does not need another plan but an action agenda that drives change through a process and institutional structure focused on implementation
Peru needs to build a broad consensus on its strengths across society
19
Structure of the ProjectAdvisory Board Joint Peruvian and Boston Team Macroeconomic Competitiveness GroupTax Reform Security Health Reform
Business Environment GroupEducation Financial Innovation Infrastructure Labor Energy Water Resources
Cluster Development GroupMetal-Mechanic Cluster
Organizational Structure GroupInstitutional Strengthening
Ease of Doing Business
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Executive Opinion Survey Survey conducted between May 18 and July 8, 2010 Surveyed senior executives including presidents, CEOs and other C-level managers Lima companies above $1 million in sales Other cities companies above $500,000 in sales City Lima Arequipa Chiclayo Cusco Trujillo Iquitos TOTAL Sample Size 160 80 80 80 80 71 551
What is Competitiveness? Competitiveness depends on the productivity with which a nation uses its human, capital, and natural resources. Productivity sets the sustainable standard of living (wages, returns on capital, returns on natural resources) It is not what industries a nation competes in that matters for prosperity, but how productively it competes in those industries Productivity in a national economy arises from a combination of domestic and foreign firms The productivity of local or domestic industries is fundamental to competitiveness, not just that of export industries
Only competitive businesses can create wealth and jobs Nations compete to offer the most productive environment for business The public and private sectors play different but interrelated roles in creating a productive economy20100915 Peru.ppt
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Copyright 2010 Professor Michael E. Porter
Labor ProductivitySelected Countries, 1999 to 2009Real GDP per employee (PPP adjusted US$), 2009 $120,000
UnitedStates
$100,000
$80,000Canada
$60,000
Mexico
$40,000Argentina Uruguay Chile Brazil Bolivia Philippines Colombia
Malaysia Venezuela
Russia
PeruIndonesia China
$20,000
Ecuador Thailand
$0 -2%
India Vietnam Cambodia
0%
2%
4%
6%
8%
10%
12%
Growth of real GDP per employee (PPP-adjusted), 1999 to 2009Source: authors calculation Groningen Growth and Development Centre (2010)20100915 Peru.ppt
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Copyright 2010 Professor Michael E. Porter
Determinants of CompetitivenessMicroeconomic CompetitivenessQuality of the National Business Environment State of Cluster Development Sophistication of Company Operations and Strategy
Macroeconomic CompetitivenessSocial 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 competition24Copyright 2010 Professor Michael E. Porter
Peru's Endowments
Natural Resources
Rich endowment of minerals, fishing resources, forest resources, and fertile land Unique environment for fishing resources One of the largest concentrations of tropical rainforests in the world 70 percent of the world's biodiversity The Amazon region represents an untapped treasure Location in the central zone of South America, on the Pacific coast Shares a border with Brazil, the largest market in South America. Access to the Pacific Ocean and to the Atlantic Ocean through the Amazon River Long coastline that extends 1,914 miles along the Pacific Ocean Natural conditions to develop large and efficient ports
Geographic Location
Cultural Legacy
Deep historical roots with ancient cultures Rich ethnic and cultural diversity Great variety of archeological sites. Machu Picchu is recognized as one of the wonders of the world Commitment to work, creativity, and entrepreneurial spirit of Peruvians
25
Determinants of CompetitivenessMicroeconomic CompetitivenessQuality of the National Business Environment State of Cluster Development Sophistication of Company Operations and Strategy
Macroeconomic CompetitivenessSocial 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 competition26Copyright 2010 Professor Michael E. Porter
Macroeconomic CompetitivenessSocial Infrastructure and Political Institutions Human development Basic education Health system
Macroeconomic PoliciesFiscal policy Government surplus/deficit Government debt
Political institutions Political freedom Voice and accountability Political stability Government effectiveness Centralization of economic policymaking
Monetary policy Inflation
Rule of law Security Judicial independence Efficiency of legal framework Business costs of corruption Civil rights
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Copyright 2010 Professor Michael E. Porter
Competitiveness and Poverty Reduction
Economic Development
Social Development
There is a strong connection between economic and social development Improving competitiveness and decreasing poverty requires improving the economic and social context simultaneously
20100915 Peru.ppt
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Copyright 2010 Professor Michael E. Porter
Determinants of Competitiveness
Microeconomic CompetitivenessQuality of the National Business Environment State of Cluster Development Sophistication of Company Operations and Strategy
Macroeconomic CompetitivenessSocial Infrastructure and Political Institutions Macroeconomic Policies
Sophistication of Company Operations and Strategy The internal skills, capabilities, and management practices needed for companies to attain the highest level of productivity and innovation possible
Endowments
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Copyright 2010 Professor Michael E. Porter
Determinants of Competitiveness
Microeconomic CompetitivenessQuality of the National Business Environment State of Cluster Development Sophistication of Company Operations and Strategy
Quality of the National Business Environment The external business environment conditions that allow companies to reach high levels of productivity and innovation
Macroeconomic CompetitivenessSocial Infrastructure and Political Institutions Macroeconomic Policies
Endowments
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Copyright 2010 Professor Michael E. Porter
Quality of the National Business EnvironmentContext for Firm Strategy and Rivalry Local rules and incentives that encourage investment and productivity Open and vigorous local competition
Factor (Input) Conditions Access to high quality business inputs
Demand Conditions
Sophisticated and demanding local customers and needs
Related and Supporting Industries Availability of suppliers and supporting industries
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 competing31Copyright 2010 Professor Michael E. Porter
Determinants of Competitiveness
Microeconomic CompetitivenessQuality of the National Business Environment State of Cluster Development Sophistication of Company Operations and Strategy
Macroeconomic Competitiveness State of Cluster Development A geographic concentration of firms, specialized assets, and institutions in particular fields.Social Infrastructure and Political Institutions Macroeconomic Policies
Endowments
20100915 Peru.ppt
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Copyright 2010 Professor Michael E. Porter
Cusco Tourism ClusterInstitutions for Collaboration
Travel AgentsMarketing Agencies Food Suppliers
Tour Operators
Local retail and other services (Internet cafes, etc.)
RestaurantsProperty Services
Attractions and activities(e.g. National Parks, cultural shows)
Restoration/ conservation
Crafts
Maintenance Services Hospitality equipment suppliers
Accommodations
Transport
(hotels, hostels, lodges) (land, air, rail and river)
Banking Services / Foreign Exchange
Related clusters Food Cluster
Government Agencies
Educational and Research Institutions
Health ClusterSource: Adapted from HBS student project, 2010 Peru Tourism Cluster; Agung, Anand, Bhardan, Ilanos, Nosher
Clusters and Competitiveness
Clusters increase productivity and operational efficiency Clusters stimulate and enable innovations Clusters facilitate commercialization and new business formation
Clusters reflect the fundamental influence of linkages and spill-overs across firms and associated institutions in competition
Competitiveness Master - 2009-04-20.ppt
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Copyright 2009 Professor Michael E. Porter
Clusters and Economic DiversificationLinkages Across ClustersFishing & Fishing Products Agricultural Products Processed Food Hospitality & Tourism Entertainment Textiles Prefabricated Enclosures
Transportation & Logistics
Furniture Building Fixtures, Equipment & Services Lightning & Electrical Equipment Power Generation Heavy Construction Services Forest Products Construction Materials
Jewelry & Precious Metals
Distribution Services Business Services
Aerospace Vehicles & Information Defense Tech.
Financial Services
Analytical Education & Instruments Knowledge Medical Creation Devices Communications Publishing Equipment & Printing Biopharmaceuticals Chemical Products
Heavy Machinery Motor Driven Products Production Technology
Tobacco Mining & Metal Automotive Aerospace Manufacturing Engines Sporting & Recreation GoodsCopyright 2009 Professor Michael E. Porter
Apparel
Oil & Gas Plastics
Footwear
Leather & Related Products
Note: Clusters with overlapping borders or identical shading have at least 20% overlap 35 Competitiveness Master - 2009-04-20.ppt (by number of industries) in both directions.
Stages of National Competitive DevelopmentShifting Policy Imperatives
Factor-Driven Economy
InvestmentDriven Economy
InnovationDriven Economy
Low Cost Inputs Macro, political, and legal stability Improving human capital Efficient basic infrastructure Lowering regulatory costs of doing business
ProductivityIncreasing local rivalry Market opening Advanced infrastructure Incentives and rules encouraging productivity Cluster formation and activation
Unique Value Advanced skills Scientific and technological institutions Incentives and rules encouraging innovation Cluster upgrading
Source: Porter, Michael E., The Competitive Advantage of Nations, Macmillan Press, 1990Competitiveness Master - 2009-04-20.ppt
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Copyright 2010 Professor Michael E. Porter
Macroeconomic Policy: Assessment Sound policies have allowed Perus fundamental macroeconomic stability to steadily improve over the past decade The implementation of the inflation-targeting framework has been successful in reducing inflation Peru's fiscal stabilization fund provided stability and allowed effective stimulus during the global crisis The economy continues to be highly dollarized with most credits denominated in dollars About half of the banking system is currently dollarized and most commodity exports are priced in US-dollars BUT Perus public finances remain overly dependent on commodities, with as much as one third of tax revenues coming from commodity-related sources Peruvian tax rates are high relative to peers Peru must set policies that ensured the responsible use of credit37
Political Institutions: AssessmentCorruption One of critical weaknesses constraining Peruvian development High corruption is due to weak institutions, poor governance practices and the excessive influence of private interests Corruption cases are usually not reported to authorities The institutions perceived to be most corrupt are Congress, the political parties, the national police, and judicial institutions
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Rank in Global Corruption Index, 2009
Corruption Perception Index, 2009Canada
Low corruption
DeterioratingUSA Chile Uruguay
Improving
Costa Rica
Cuba Brazil Trinidad and Tobago El Salvador Mexico
Peru, ColombiaChina Panama India Guatemala
Dominican Republic Argentina Bolivia
High corruption
Nicaragua
Honduras
Russia Venezuela
Ecuador Paraguay
Change in Rank, Global Corruption Report, 2009 versus 2003Note: Ranks only countries available in both years (131 countries total) Source: Global Corruption Report, 200939Copyright 2010 Professor Michael E. Porter
Political Institutions: AssessmentCorruption One of critical weaknesses constraining Peruvian development High corruption is due to weak institutions, poor governance practices and the excessive influence of private interests Corruption cases are usually not reported to authorities The institutions perceived to be most corrupt are Congress, the political parties, the national police, and judicial institutions
Security There has been a deterioration of the security situation, mainly due to the organized crime, illegal drug trade, terrorism and a general decline in public safety The influence of drug traffickers is starting to penetrate institutions and the political system Social unrest occurs most often in places where government institutions are weak
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Social Infrastructure: AssessmentEducation High formal enrollment but low quality Weak infrastructure in the public school system Curriculum is poorly structured, and one teacher must cover multiple grades Health The health system continues to be characterized by generally low quality and high disparities in quality, particularly affecting the poor Poverty diseases such as tuberculosis are still more prevalent than in peer countries Health care spending in Peru remains the lowest among its Latin American peers There is a mismatch between the supply and demand for health professionals
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Assessment: Perus Business EnvironmentContext for Firm Strategy and Rivalry+ Openness to foreign investment, trade, capital flows + Improvements in investor protections Factor Efforts to strengthen competition Demand (Input) policy Conditions Conditions Rigidity of employment Difficulty in business formation Low intensity of local competition High Informality of the economy + Improving consumer protection Abundant resources: mineral, regulation agricultural, fishing, and cultural Improving sophistication of local buyers Advantageous location Weak environmental standards Improving administrative infrastructure Related and enforcement Simplified customs procedures Supporting Sound banking system, but high interest Industries spreads Improving financial markets, but limited venture capital availability Limited local suppliers and Poor physical infrastructure supporting industries Low skill levels in the labor force, Shallow clusters mismatch with demand Weak university-industry research collaboration Few high-quality research and scientific institutions
+ + + +
Factor (Input) Conditions
Factor input conditions in Peru lag regional peers, particularly in physical infrastructure.
Administrative infrastructure Peru has made important reforms in simplifying administrative procedures
Ease of Doing BusinessSouth America, 2011Venezuela: 172 Guyana: 100 Suriname: 161
Colombia: 39
Ecuador: 130
Peru: 36Bolivia: 149
Brazil: 127
Paraguay: 106 Chile: 43 Uruguay: 124
Argentina: 115
Source: The World Bank, Doing Business (2011), 183 countries20100915 Peru.ppt
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Copyright 2010 Professor Michael E. Porter
Ease of Doing BusinessRanking, 2011 (of 183 countries)
Peru, 2011Favorable Unfavorable
120
100
Perus per capita GDP rank: 81
80
60
40
20
0Ease of Doing Getting Credit Business Protecting Investors Registering Property Trading Across Borders Starting a Business Paying Taxes Closing a Business Dealing with Construction Permits Enforcing Contracts
Source: The World Bank, Doing Business (2011), GDP rank on GDP per capita, ppp-adjusted20100915 Peru.ppt
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Copyright 2010 Professor Michael E. Porter
Factor (Input) Conditions
Factor input conditions in Peru lag regional peers, particularly in physical infrastructure.
Administrative infrastructure Peru has made important reforms in simplifying administrative procedures Physical infrastructure While Peru has increased infrastructure investment in recent years, it lags in electrical generation capacity, telephone lines, and paved roads relative to its Latin American peers. Infrastructure services remain expensive Education and workforce skills The education system produces comparatively few graduates in technical areas, engineering, and physical sciences Peru is last in spending on education among its peers Financial system Financial assets are highly concentrated. Four banks hold 83% of all bank loans Borrowing costs are high The Peruvian pension fund system is characterized by low participation Science and technology infrastructure Perus science and technology infrastructure is very weak.
Context for Firm Strategy and Rivalry
Barriers to trade and investment have been reduced, but labor market efficiency and local rivalry remain limited
Foreign trade and investment policy Since the early 1990s, Perus foreign trade and investment policy has been aimed at a process of deregulation and liberalization of the trade regime Peru has signed a significant number of free trade agreements with several countries, such as the United States and China However, investment flows (in and out) remain low in comparison with its neighbors Anti-trust policy Peru has an advanced regulatory framework for antitrust. But, implementation is weak Peru's domestic industries are highly concentrated, with evidence of oligopolistic practices and cartels A high level of informality in the economy eases counterfeiting and money laundering
Labor market Perus labor market is highly rigid, ranked by the World Bank as 149 out of 181 economies. There is no unified labor code in Peru High non-wage labor costs deter formal job creation
Demand Conditions
Peruvian consumer sophistication is increasing. Consumer protection and environmental regulations are in place but not well enforced
Local demand sophisticationEconomic growth has led to the emergence of a new middle class that has access to consumer credit, has become aware of new products and brands, and demands quality
Quality and environmental standardsRegulations exist to protect quality, health, safety, and environmental standards, but there is no mechanism to enforce these regulations or the consumer code. And, in practice, the large informal sector operates outside of these protections
Related and Supporting Industries
Availability of suppliers and supporting industries remains low, and Peruvian clusters are shallow
Export industries Perus exports are highly concentrated on natural resource-based products. These activities are not well integrated into the local economy and have not generated local upstream and downstream industrial activities
Presence of suppliers There is a lack of local suppliers of machinery, equipment and services. Most e products and services are imported Local production of inputs and machinery is in its infancy and cannot support advanced export-oriented companies
Cluster Development Nascent clusters are present, but there are few cluster initiatives.. There is a poor tradition of collaboration between the government and the private sector in the area of cluster development
Perus National Export Portfolio1997 to 20092.5%Change In Perus Overall World Export Share: +0.09%
Jewelry and Precious Metals
2.0%Perus world export market share, 2009
1.5%
Metal, Mining and Manufacturing
1.0%
Agricultural Products
Fishing and Fishing Products
0.5%Financial Services Communications Services Apparel Hospitality and Tourism Publishing and Printing Perus Average World Export Share: 0.22%
0.0% -0.5%
0.0%
0.5%
1.0%
1.5%Exports of US$2 Billion =Copyright 2010 Professor Michael E. Porter
Change in Perus world export market share, 1997 to 2009Source: 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. 50
Perus National Export Portfolio1997 to 20090.14%Transportation and Logistics Oil and Gas Products and Services
0.12%Perus world export market share, 2009Furniture Textiles
0.10%Chemical Products
Construction Materials Processed Food
0.08%Plastics
0.06%
Leather and Related Products
Forest Products
0.04%Business Services Biopharmaceuticals Building Fixtures and Equipment Motor Driven Products Heavy Machinery
0.02%
Footwear Power and Power Generation Equipment Prefabricated Enclosures and Structures Production Technology Communications Equipment Automotive
0.00% -0.02%
-0.01%
0.00%
0.01%
0.02%
0.03%
0.04%
0.05%
0.06%
0.07%
0.08%
Change in Perus world export market share, 1997 to 2009
Exports of US$2 Billion =Copyright 2010 Professor Michael E. Porter
Note: Showing clusters with greater than $10 mil exports. 51 Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, HBS; Richard Bryden, Project Director.
Share of World Exports by ClusterWorld Market Share 0.2% - 0.5% 0.5% - 1.0% 0.95% - 1.9%Fishing & Fishing Products Entertainment Textiles Prefabricated Enclosures
Peru, 2008Hospitality & Tourism Agricultural Products Transportation & Logistics Aerospace Vehicles & Information Defense Tech.
Furniture Building Fixtures, Equipment & Services Lightning & Electrical Equipment Power Generation Construction Materials Heavy Construction Services Forest Products
Processed Food Jewelry & Precious Metals Business Services
Distribution Services
Financial Services
Analytical Education & Instruments Knowledge Medical Creation Devices Communications Publishing Equipment & Printing Biopharmaceuticals Chemical Products Oil & Gas
Motor Driven Products Tobacco
Heavy Machinery
Production Technology Automotive
Apparel Leather & Related Products
Plastics
Aerospace Mining & Metal Engines Manufacturing
Footwear
Sporting & Recreation Goods52
Marine Equipment
Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions.Copyright 2010 Professor Michael E. Porter
Specialization in Perus RegionsSelected ExamplesPiura Agricultural Products: Mangoes, Lemons, Brown Sugar Syrup Cajamarca (Bambamarca) Dairy, Processed Foods La Libertad (El Porvenir, Trujillo) Leather, Footwear
Ancash (Chimbote) Fishing and Fish Products Lima (Infantas, Los Olivos) Metal Manufacturing, Metal Furniture Lima (La Victoria) Apparel Ica Wine Cuzco Tourism Puno and Arequipa Apparel from Alpaca53
Assessment: Peruvian Clusters Perus current clusters are based heavily on natural endowments, and have much room for further upgrading Regions such as the Cajamarca, Arequipa, and Moquegua have concentrations in mining, but the clusters are mostly shallow with weak linkages between firms and local suppliers and experiencing significant technological bottlenecks In the main cities of Peru there are some emerging clusters consisting largely of small firms Perus clusters have weak suppliers and few supporting institutions There is a weak institutional capacity in the regions hampering the development of clusters There is a limited tradition of collaboration among actors for regional development54Copyright 2010 Professor Michael E. Porter
Cluster Development Programs in Peru There are some encouraging programs, such as the CITEs Support programs for cluster development have limited resources and scope, and have been directed toward SMEs Cluster development have been supported primarily multilaterals and international cooperation agencies Programs were driven centrally without building capacity at the regional level Programs have failed to create permanent institutions and sustainable processes of collaboration amongst key actors such as local governments, academic institutions, training centers, private sector and relevant institutions for collaboration
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Copyright 2010 Professor Michael E. Porter
Creating and Economic StrategyNational Value Proposition What is the distinctive competitive position of Peru 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 development56Copyright 2010 Professor Michael E. Porter
Role of a National Value Proposition
The value proposition should be an inspiration to the Peruvian population
The value proposition is a signal to companies from abroad and at home about what assets and conditions can expect to find in Peru
The value proposition is a signal to policy makers in Peru of what type of improvements are most critical in order to make the value proposition a reality
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Copyright 2010 Professor Michael E. Porter
Peru's Competitiveness Strategy
National Value Proposition
Goals
Action Agenda
Implementation Plan
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Copyright 2010 Professor Michael E. Porter
Towards a Peruvian Value Proposition
What is Unique about Peru?
ENDOWMENTS Abundant natural resources Central location in South America Vast biodiversity and ecosystems
BUSINESS ENVIRONMENT Privileged access to foreign markets Open to FDI and capital flows
PEOPLE AND CULTURE Rich culture and history Creative and entrepreneurial population Young, hardworking population Legacy of domestic cooperation to overcome obstacles
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Towards a Peruvian Value Proposition
A secure, neutral and peaceful country Enhanced the Sophistication of Endowment Related Exports Dynamic regional development with vibrant clusters
Preserving Natural and Cultural Resources
A hub for trade between Latin America, Asia, and North America
Improve Cross-Cutting Policies60Copyright 2010 Professor Michael E. Porter
National Value Proposition: A secure, neutral and peaceful countryPeace and neutrality in Peru have been crucial to the good economic performance of the last two decades, but Peru remains at risk of deteriorating security.
Reduce corruption to fight informality and inequality Empower security institutions and foster links with local communities
A secure, neutral and peaceful country
Break the cycle of drug trafficking and insurgency Develop regional clusters to generate a stronger link between the growth process and new employment
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National Value Proposition: Utilizing EndowmentsPerus endowments have attracted significant interest from foreign and domestic investors already in the past. Peru must create higher value from its endowments driven clusters. Provide highly efficient infrastructure and an efficient regulatory environment to make Peru one of the most productive locations for accessing natural resources Ensure that regulatory conditions enable endowments to be used in ways that are ecologically and culturally sustainable Upgrade and deepen clusters drawing on Peru's endowments and develop suppliers, services and related clusters
Enhanced the Sophistication of Endowment Related Exports
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National Value Proposition: A Trade HubPerus geographic location, its array of free trade agreements, and its macroeconomic and political stability make it a natural hub for trade between Latin America, North America, and Asia
Maintain and extend low trade barriersA hub for trade between Latin America, Asia, and North America
Improve the efficiency and quality of trade enabling regulation and infrastructure. Mobilize and develop clusters of trade related services including logistics and finance
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National Value Proposition: DecentralizationPerus development remains highly heterogeneous across different parts of the country. The emergence of a larger middle class remains limited to a few regions in the country. Sustained growth can only be achieved if all subnational regions develop by upgrading their competitiveness.
Build unique regional economies based on local strengths.Dynamic regional development with vibrant clusters
Upgrade key weaknesses including regional education, regulatory conditions, and infrastructure Strengthen regions through upgrading regional institutions
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Lima metalworking cluster: Example of a Cluster Development InitiativeFoundries Plastics Design shops Metals Paints and chemicals Services(lab, etc)
Agriculture
Automotive Appliances
Electricitycompanies
Plastics
MiningRestaurants
Molds Tools Recycling
Equipment(electrical, mining, etc)
Financial Logistics Packaging Advisory services Security
Parts(isolators, etc)
Software / IT Technology transfer
Custom services
Government Institutions
Educational Institutions
Business Institutions
Multilateral Institutions
Action Agenda
POLICIES Sustain the security improvements against old and new threats
A secure, neutral and peaceful country
Maintain improvements achieved in security and prevent a pronounced increased in organized crime an violence Empower security institutions and foster links with the community
Systematically reduce corruption Simplify rules and regulations to reduce the cases in which corruption can occur Promote a new governance ethic in political and business leaders
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Secure, Neutral and Peaceful: Action AgendaSustain the security improvements against old and new threats
Action Areas Public safety is critical to becoming a trading hub Maintain improvements achieved in security and prevent a pronounced increased in crime an violence Empower security institutions and foster links with the community
Specific Recommendations Frame an institutional setting where a single institution concentrates efforts to fight drug trafficking and terrorist activitiesSupport market-based income-substitution programs, control of chemical inputs for coca transformation, drug interdiction, and anti-money laundering efforts
Reform the police force considering labor regime, salary and equipment and needs Strengthen the powers of local mayors as presidents of local public safety committees in coordination with the police Engage local communities to prevent social unrest Support comprehensive policies - covering crime prevention, crime investigation, the judicial system, the jail system, and re-insertion programs.67Copyright 2010 Professor Michael E. Porter
Secure, Neutral and Peaceful: Action AgendaSystematically reduce corruption
Action Areas Reduce corruption to thrust domestic economic activity and take advantage of opportunities created through open trade policy Generate a strong track record of fighting against corruption Consider its effects on informality and inequality
Specific Recommendations Launch a systematic campaign to reduce corruption and investigate corruption cases Simplify rules and regulations to reduce the cases in which corruption can occur Foster clean governance in political and business leaders Improve the quality of the civil service. Support meritocracy, responsibility, accountability, training and adequate compensation. Key public officials should be appointed in a process with the consent of the Congress
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Action AgendaPOLICIES Focus efforts on becoming the springboard for South American firms seeking access to U.S. and Asian markets Deepen free trade policies
A hub for trade between Latin America, Asia and North America
Intensify policy of negotiating free trade agreements Eliminate remaining domestic barriers to trade and investment: tariffs, non-tariff measures and export subsidies
Improve physical connections with other countries Transportation Energy and Water
CLUSTERS Transportation and Logistics Financial Services
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Action AgendaPOLICIES Transform endowment-based industries into broad clusters Launch an ambitious cluster development program
Enhanced the Sophistication of Endowment Related Exports
Build organizational processes in which all actors, particularly private sector representatives, collaborate in building a common vision for each cluster Diversify the economy by developing related clusters
CLUSTERS Metal Mining and Manufacturing Hospitality and Tourism Biodiversity
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Action AgendaPOLICIES Design a modern policy for regional development Devise a strategy for each region based on its unique attributes and strengths
Dynamic regionalized development with vibrant clusters
Enhance education and workforce skill development Focus on education as a central enabling condition for productivity Align education supply with needs through collaboration with clusters
CLUSTERS Metalworking Apparel Leather Fishing and Fishing Products Footwear Agricultural Products Wine
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Improve Cross Cutting Policies
Sustain path of sound macroeconomic policy Ensure adequate basic education and health careFocus basic education on enforcing quality standards Improve basic education services with the vision to reduce inequality and foster social inclusion Reform healthcare system to increase coverage and provide better value Focus on preventive care to reduce costs Concentrate on vulnerable segments of the population
Reduce the cost of doing business through better rules and regulations:Rules of the judiciary system Taxes Labor market regulations
Strengthen access to capitalIncrease financial-sector competition and access to capital Encourage the development of new financial instruments
Develop science and technology capabilitiesExpand university-business collaboration Encourage industry to absorb and improve foreign technology Involve talented expatriate professionals Improve innovation infrastructure
Improve the effectiveness of the government
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Eleven Goals for 2021Income and Inclusion Peru will be in the upper tier of middle-income countries with an income per capita of $10,000 Peru will reduce its poverty level to 20 percent Peru will reduce rates of malnutrition to less than 10 percent
International Peru will be one of the top two South American countries in volume of trade with Asia Peru will be the first-ranked recipient of foreign direct investment among the countries along the South American Pacific coast
Regional development Peru will have at least seven regional centers of development across the coastal, highlands and Amazon regions
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Peru will be in the upper tier of middle-income countries with an income per capita of $10,000 GDP per Capita(in 1990 PPP US$)
$12,000
GOAL$10,000
$8,000
$6,000
$4,000
$2,000
PAST
PRESENT
$01971 1976 1981 1986 1991 1996 2001 2006 2011 2016 2021Note: PPP using Geary Khamis calculation methodology.74 Source: Groningen Growth and Development Centre, Total Economy DatabaseCopyright 2010 Professor Michael E. Porter
Peru will reduce its poverty level to 20 percent% of Population Under the Poverty Line
GOAL PAST PRESENT
Source: Compendio Estadstico, Instituto Nacional de Estadistica e Informatica (INEI), 2010; own projections75Copyright 2010 Professor Michael E. Porter
Peru will be one of the top two South American countries in volume of trade with Asia Total trade (USDmillions)
PAST
PRESENT
GOAL
Source: Trade Map from official sources (http://trademap.org) ; own projections76Copyright 2010 Professor Michael E. Porter
Peru will be the first-ranked recipient of foreign direct investment among the countries along the South American Pacific coastFDI Inflows (USD millions)
GOAL
PAST
PRESENT
Source: UNCTADSTAT (http://unctadstat.unctad.org); own projections77Copyright 2010 Professor Michael E. Porter
Eleven Goals for 2021
Education Peru will pass from the third to the second tier in the evaluation made by the OECD Program for International Student Assessment (PISA) All high school graduates will be proficient in the English language
Corruption The country will pass from "mid-level" to "low-level" for corruption in the region, as measured by Transparency International's Corruption Perceptions Index
Cluster Development Peru will adopt a cluster-based strategy for development Peru will upgrade and develop well-established clusters in mining, tourism/gastronomy, fishing, agribusiness, and manufacturing
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Peru will pass from the third to the second tier in the evaluation made by the OECD Program for International Student Assessment (PISA)% of top countries (out of 65 countries)
120%
100%
80%
60%
40%
20%
PAST
GOAL
0%2000 201479
2018
2021Copyright 2010 Professor Michael E. Porter
Source: OECD Program for International Student Assessment (PISA) 2000. Authors calculations
Peru will pass from "mid-level" to "low-level" for corruption in the region, as measured by Transparency International's Corruption Perceptions Index% of less corrupted countries (out of 180 countries)
70%
60%
50%
40%
30%
20%
10%
PAST
TODAY
GOAL
0%2006 2007 2008 200980
2010
2014
2018
2021Copyright 2010 Professor Michael E. Porter
Source: Transparency Report. 2010 Corruption Perception Index. Authors calculations
Implementation Strategy: Sequencing of Policies
Financial system Science and Technology
Education and Health Care Regional Development Cluster Development Regional Development Security Anticorruption Physical Infrastructure Skills
Maintain Government Policy Programs
Immediate
Long term
Priority81Copyright 2010 Professor Michael E. Porter
Implementation Peru's Economic Strategy: Organizational Structure Reinvigorate the Peruvian National Competitiveness Council (NCC) to coordinate economic strategy and implementation Chaired by the Prime Minister Set within the Prime Minister's office Membership by all involved ministers and government officials Secretariat responsible for agenda and accountability
The NCC should have an appropriate budget and a well-trained and qualified staff for technical support Representative university and civil society leaders should be formal members in the NCC Private sector participation in economic policy should be coordinated by a Peruvian Private Competiveness Council (PPCC)
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Summary Peru has made significant progress towards becoming a prosperous economy and a better society Peru has many assets, and already made important policy choices towards a better future. The results over the last few years are a clear validation of this course BUT There is much more to do Many parts of society and regions of the country have not fully participated in the countrys recent growth Many dimensions of competitiveness remain weak and have to be improved
The proposed strategy outlined here offers an ambitious but realistic plan forwardIt defines clear priorities, identifies concrete action steps, and sets measurable objectives
Change will occur only if consensus builds within Peru The process 83 needs to continue
Copyright 2010 Professor Michael E. Porter