The Microeconomics of Development

Professor Michael E. Porter

Harvard Business School

Competitiveness and Development

Vision and Priorities for Action
Caracas, Venezuela
June 20-21, 2001

This presentation draws on ideas from Professor Porter’s articles and books, in particular, The Competitive Advantage of Nations (The Free Press,
1990); The Global Competitiveness Report, (World Economic Forum, 1998, 1999, and 2000); and “Clusters and the New Competitive Agenda for
Companies and Governments” in On Competition (Harvard Business School Press, 1998). 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.
 Stages of Economic Reform
Stage
Stage 11
• Macroeconomic stabilization
• Privatization of government-
owned companies
• Opening of the economy to
international trade and
investment (external
competition)
• Financial market reform and
opening
ACP Steering Committee 06-21-01 CK
Stage
Stage 22
• Upgrading the microeconomic
business environment
• Unleashing internal
competition
• Development of cluster-
specific skills, infrastructure,
supporting industries, and
related institutions
2 Copyright © 2001 Professor Michael E. Porter
 Sources of Rising 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”, rather it reveals a
lack of fundamental competitiveness

• 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
ACP Steering Committee 06-21-01 CK 3 Copyright © 2001 Professor Michael E. Porter
 Changing Sources of Prosperity

Comparative Competitive
Advantage Advantage

Wealth is set by Wealth is created by a

endowments nation’s policy and
competition choices

Resource trap

ACP Steering Committee 06-21-01 CK 4 Copyright © 2001 Professor Michael E. Porter

 Determinants of Productivity and Productivity Growth

Macroeconomic,
Macroeconomic,Political,
Political,and
andLegal
LegalContext
Contextfor
forDevelopment
Development

Microeconomic
MicroeconomicFoundations
Foundationsof
ofDevelopment
Development
Sophistication
Sophistication Quality
Qualityof
ofthe
the
of
ofCompany
Company Microeconomic
Microeconomic
Operations
Operationsand
and Business
Business
Strategy
Strategy Environment
Environment

• Sound macroeconomic policies and a stable political / legal context are

necessary to ensure a prosperous economy, but not sufficient
• Competitiveness ultimately depends on improving the microeconomic
foundations of competition

ACP Steering Committee 06-21-01 CK 5 Copyright © 2001 Professor Michael E. Porter

 Global Competitiveness Report 2000
The Relationship Between Microeconomic Competitiveness
and GDP Per Capita
35,000
United States

30,000 Singapore
Norway Iceland Switzerland
Denmark
Canada
Belgium
25,000 Ireland Japan Australia
Hong Kong Austria Netherlands
Italy France Germany Finland
United Kingdom Sweden

20,000 Taiwan
1999 GDP per Spain New Zealand
Portugal
Capita* Israel
15,000 Greece Korea
Chile
Czech Republic
Mauritius Hungary
Argentina Slovakia
10,000
Poland Malaysia
Venezuela Colombia Mexico
South Africa
Russia Costa Rica Turkey
Ecuador Bulgaria Peru Thailand Brazil
5,000
ChinaEgypt
Ukraine Philippines
Bolivia El Salvador Indonesia Jordan
Zimbabwe India
Vietnam
-
-2 -1.5 -1 -0.5 0 0.5 1 1.5 2

Microeconomic Competitiveness Index

* Adjusted for Purchasing Power Parity
Source: Porter, Michael E. “The Current Competitiveness Index: Measuring the Microeconomic Foundations of Prosperity.” The Global
Competitiveness Report 2000, New York: Oxford University Press, 2000
ACP Steering Committee 06-21-01 CK 6 Copyright © 2001 Professor Michael E. Porter
 Productivity and the Microeconomic Business Environment
Context
Context for
for
Firm
Firm
Strategy
Strategy
and
and Rivalry
Rivalry

• A local context that

encourages efficiency,
investment, and
Factor
Factor sustained upgrading Demand
Demand
(Input)
(Input) • Open and vigorous Conditions
Conditions
Conditions
Conditions competition among locally
based rivals

• High quality, specialized • Sophisticated and

inputs available to firms:
–human resources
–capital resources
–physical infrastructure
–administrative infrastructure
–information infrastructure
–scientific and technological
infrastructure
–natural resources
ACP Steering Committee 06-21-01 CK
demanding local customer(s)
• Unusual local demand in
Related
Related andand specialized segments that can
Supporting
Supporting be served globally
Industries
Industries • Customer needs that
anticipate those elsewhere
• Presence of capable, locally
based suppliers and firms in
related fields
• Presence of clusters instead
of isolated industries
7 Copyright © 2001 Professor Michael E. Porter
 The California Wine Cluster Winemaking
WinemakingEquipment
Equipment

Grapestock
Grapestock Barrels
Barrels
State Government Agencies
(e.g., Select Committee on Wine
Production and Economy)
Fertilizer,
Fertilizer, Pesticides,
Pesticides, Bottles
Bottles
Herbicides
Herbicides

Grape Caps
Caps and
andCorks
Corks
GrapeHarvesting
Harvesting
Equipment
Equipment

Labels
Labels
Irrigation
Irrigation Technology
Technology Wineries/Processing
Wineries/Processing
Growers/Vineyards
Growers/Vineyards Facilities
Facilities Public
PublicRelations
Relationsand
and
Advertising
Advertising

Specialized
SpecializedPublications
Publications
(e.g.,
(e.g.,Wine
WineSpectator,
Spectator,Trade
Trade
Journal)
Journal)

California
California Educational,
Educational, Research,
Research, && Trade
Trade Tourism
Tourism Cluster
Cluster
Agricultural
Agricultural Cluster
Cluster Organizations
Organizations (e.g. Wine
(e.g. WineInstitute,
Institute,
UC
UCDavis,
Davis,Culinary
CulinaryInstitutes)
Institutes)

Food
Food Cluster
Cluster
Sources: California Wine Institute, Internet search, California State Legislature. Based on research by MBA 1997 students R.
Alexander, R. Arney, N. Black, E. Frost, and A. Shivananda.
ACP Steering Committee 06-21-01 CK 8 Copyright © 2001 Professor Michael E. Porter
 The Costa Rica Information Technology Cluster

State
StateGovernment
Government Agencies
Agencies
(e.g.,
(e.g., export and investments promotion agencies: Cinde
export and investments promotion agencies: Cindeand
andProcomer)
Procomer)

Electronic Assembly

Specialized
Specialized Packaging
Packaging Computer
Computer Software
Software
(e.g.,
(e.g., plastics,
plastics, corrugated
corrugated
materials) (e.g., ArtinSoft)
(e.g., ArtinSoft)
materials) Other
electronic components
(e.g., circuitboards)

Passive
electronic components
(e.g., inductors, transistors)
Specialized
Specialized chemicals
chemicals Venture
Venturecapital
capital firms
firms

Semiconductor Production

Specialized
Specialized academic
academicandandtraining
traininginstitutions
institutions
(e.g.,
(e.g., Instituto Tecnológico de Costa Rica, Instituto
Instituto Tecnológico de Costa Rica, InstitutoNacional
Nacionalde
de Aprendizaje)
Aprendizaje)

Source: Niels Ketelhohn research for Professor Michael E. Porter

ACP Steering Committee 06-21-01 CK 9 Copyright © 2001 Professor Michael E. Porter
 The Ecuadorian Shrimp Farming Cluster

Banking Hatcheries
Hatcheries Energy
Banking && Energy
Finance
Finance (electric
(electricutil,
util, fuel)
fuel)

Insurance
Insurance Fertilizers
Fertilizers
Farms
Farms
Security
Security
Food
Food Processing
Processing
Equipment
Equipment
Construction
Construction
Processing
Processing Packaging
Packaging
Technical
Technical
Assistance
Assistance

Transportation
Transportation&& Freezer
FreezerContainers
Containers
Shipping
Shipping
Export
Export

Fishing
Fishing Cluster
Cluster

ACP Steering Committee 06-21-01 CK 10 Copyright © 2001 Professor Michael E. Porter

 Regional Clusters in Selected U.S. Metropolitan Area

Denver, CO
Oil and Gas Chicago
Power Generation Processed Foods
Lighting and Electrical Equipment Boston
Seattle-Bellevue-Everett, WA Processed Foods
Plastics Education and Knowledge Creation
Fishing & Fishing Products
Analytical Instruments
Aerospace Vehicles & Defense
Footwear
Analytical Instruments

San Francisco-
Oakland-San Jose
Bay Area
Information Technology New York City
Communications Financial Services
Power Generation Publishing & Printing
Jewelry and Precious Metals

Atlanta, GA
Entertainment
Construction Materials
Transportation and Logistics
Los Angeles Area Houston
Aerospace Vehicles & Defense Oil and Gas
Entertainment Chemical Products
Apparel Heavy Construction Services

Source: Cluster Mapping Project at the Institute for Strategy and Competitiveness, Harvard
Business School. 11
ACP Steering Committee 06-21-01 CK Copyright © 2001 Professor Michael E. Porter
 Geographic Levels and Competitiveness

Groups
Groupsofof
Neighboring e.g., Andean
Neighboring
Nations
Nations

Nations e.g., Bolivia, Ecuador

Nations

States, e.g., Vichada (Colombia),

States,Counties,
Counties, Monagas (Venezuela)
Departments
Departments

Metropolitan
Metropolitan e.g., Bogotá (Colombia),
Areas
Areas Trujillo (Perú)

Cities e.g., Cuenca (Ecuador),

Cities/ /
Towns Cajamarca (Perú)
Towns

ACP Steering Committee 06-21-01 CK 12 Copyright © 2001 Professor Michael E. Porter

 Clusters in Andean Countries
Example: Peru

Materials and Metals Petroleum/

Petroleum/
Products
Products Plastics
Crude Plastics
Crude
Petroleum
Petroleum
Gold
Gold Natural
Chemicals Natural Petroleum and
Silver
Silver Chemicals Gas
Gas
Lead Chemicals
Lead

Zinc
Copper Zinc
Copper Services
Fiber
Fiber
Tourism Wood
Tourism Wood

Paper
Paper
Fresh
FreshFish
Fish
Shellfish
Shellfish Animal Oils
Animal Oils Forest
(Shrimp) and Fats
(Shrimp) and Fats Products
Undergarments
Undergarments

Coffee Cereals
Cerealsand
and
Coffee Bran Outerwear
Food and BranMeal
Meal Outerwear
Beverage Textiles
and Apparel
Source: Institute for Strategy and Competitiveness, Harvard Business School.
ACP Steering Committee 06-21-01 CK 13 Copyright © 2001 Professor Michael E. Porter
 Appropriate Roles of Government in Economic Development

1. Establish a stable and predictable macroeconomic, political, and

legal environment

2. Improve the availability, quality, and efficiency of general purpose

inputs, infrastructure, and institutions

3. Set overall rules and incentives governing competition that

encourage productivity growth

4. Facilitate cluster development and upgrading

5. Create an explicit, ongoing process of economic change and

competitive upgrading which informs citizens and mobilizes the
private sector, government at all levels, educational and other
institutions, and civil society.

ACP Steering Committee 06-21-01 CK 14 Copyright © 2001 Professor Michael E. Porter

 Environmental Regulation and Competitiveness
• Competing based on weak environmental standards perpetuates low
incomes
• Corporate pollution is a sign of inefficient and unproductive use of
resources
Firm Customer
• Inefficient extraction of resources • Usable materials in products that
• Incomplete material utilization are discarded
• Unnecessary waste products • Products that use energy
• Unnecessary energy use inefficiently
• Unproductive land use • Discarded or unnecessary
packaging
• The need to control or treat pollution causes companies to perform activities
that add cost but create no customer value
- e.g., handling, storage, processing, disposal
• Pollution is a reflection of unsophisticated technology and weak
management

• Strict environmental regulation stimulates the upgrading necessary to

achieve advanced economic development
ACP Steering Committee 06-21-01 CK 15 Copyright © 2001 Professor Michael E. Porter
 Appropriate Roles of Government
in Cluster Development

• A successful cluster policy builds on sound overall

economic policies

• Government should support the development of all clusters,

not choose among them

• Government policy should reinforce established and

emerging clusters rather than attempt to create entirely new
ones

• Government’s role in cluster initiatives is as facilitator and

participant. The most successful cluster initiatives are a
public-private partnership

ACP Steering Committee 06-21-01 CK 16 Copyright © 2001 Professor Michael E. Porter

 The Costa Rica Information Technology Cluster
Context
Context for
for
Firm
Firm
Strategy
Strategy
and
and Rivalry
Rivalry

• Open trade and FDI policies that

encourage intense local
competition
• Export Processing Law that
Factor
Factor supports the IT Cluster through
easing the establishment of new Demand
Demand
(Input)
(Input) operations Conditions
Conditions
Conditions
Conditions

• Proximate location to US market • Universal computer training and

• Well educated labor force internet access in schools
• Widespread knowledge of English • Broad and growing base of local
• High computer literacy information technology users
• Ready supply of engineers and
technicians Related
Related and
and
• Flexible immigration policies for Supporting
executives and technical staff
Supporting
• Open skies airline policy
Industries
Industries
• Modern communications system
• Strong local universities
• Numerous multinationals and local firms with
• Network of science and technology
electronics production in Costa Rica Indicates government
research centers
• Development of local suppliers influence
• Explicit cluster development program
ACP Steering Committee 06-21-01 CK 17 Copyright © 2001 Professor Michael E. Porter
 Public / Private Cooperation in Cluster Upgrading
Minnesota’s Medical Device Cluster
Context
Context for
for
Firm
Firm
Strategy
Strategy
and
and Rivalry
Rivalry
• Aggressive trade associations
(Medical Alley Association, High
Tech Council)
• Effective global marketing of the
cluster and of Minnesota as the
Factor
Factor “The Great State of Health” Demand
Demand
(Input)
(Input) • Full-time “Health Care Industry Conditions
Conditions
Conditions
Conditions Specialist” in the department of
Trade and Economic Development

• Joint development of vocational- • State sanctioned

technical college curricula with the reimbursement policies
medical device industry to enable easier adoption
• Minnesota Project Outreach exposes and reimbursement for
businesses to resources available at innovative products
university and state government Related
Related and
and
agencies
Supporting
Supporting
• Active medical technology licensing
through University of Minnesota
Industries
Industries
• State-formed Greater Minnesota Corp.
to finance applied research, invest in
new products, and assist in technology
transfer
ACP Steering Committee 06-21-01 CK 18 Copyright © 2001 Professor Michael E. Porter
 Illustrative Government Policies for Cluster Development
Factor
Factor
(Input)
(Input)
Conditions
Conditions
• Create specialized
education and training
programs
• Establish local university
research efforts in cluster-
related technologies
• Support cluster-specific
information gathering and
compilation
• Improve specialized
transportation,communications,
and other infrastructure
required by cluster
ACP Steering Committee 06-21-01 CK
Context
Context for
for
Firm
Firm
Strategy
Strategy
and
and Rivalry
Rivalry
• Eliminate barriers to local
competition
• Focus efforts to attract
foreign investment around
clusters
• Focus export promotion Demand
Demand
around clusters
Conditions
Conditions
• Organize relevant
government departments
around clusters
• Create streamlined, pro-
innovation regulatory standards
affecting the cluster to
- reduce regulatory uncertainty
- stimulate early adoption
- encourage innovation or new
products and processes
Related
Related and and • Sponsor independent testing,
Supporting
Supporting product certification, and rating
Industries
Industries services for cluster
products/services
• Act as sophisticated buyer of
• Sponsor forums to bring together cluster participants the cluster’s products / services
• Cluster-specific efforts to attract suppliers and service
providers from other locations
• Establish cluster-oriented free trade zones, industrial
parks, or supplier parks19 Copyright © 2001 Professor Michael E. Porter
 Integrating Economic and Social Policy

• In the new thinking on competitiveness, there is no inherent conflict

between economic and social policy

Economic Social
Policy Policy

•• AAproductive
productiveand andgrowing
growingeconomy
economyrequires:
requires:
–– Rising
Risingskill
skilllevels
levels
–– Safe
Safeworking
workingconditions
conditions
–– Healthy
Healthyworkers
workerswho wholive
liveinindecent
decenthousing
housingininsafe
safeneighborhoods
neighborhoods
–– AAsense
senseof ofequal
equalopportunity
opportunity
–– Assimilation
Assimilationofofunderemployed
underemployedcitizens
citizensinto
intothe
theproductive
productiveworkforce
workforce
–– Low
Lowlevels
levelsofofpollution
pollution(pollution
(pollutionisisaasign
signofofunproductive
unproductiveuseuseofofphysical
physical
resources)
resources)
•• “Social”
“Social”policies
policiesmust
mustbebealigned
alignedwithwithproductivity
productivityininthe
theeconomy
economyand and
prepare
prepareandandmotivate
motivatecitizens
citizenstotosucceed
succeedin inthe
themarket
marketsystem
system
•• “Economic”
“Economic”policies
policiesmust
mustinclude
includeexplicit
explicitprograms
programstotoraise
raisehuman
humancapability
capability
and
andimprove
improvethe
thelives
livesand
andthethesense
senseof ofopportunity
opportunityforforcitizens
citizens
ACP Steering Committee 06-21-01 CK 20 Copyright © 2001 Professor Michael E. Porter
 National Business Environment
Position of Andean Countries

Competitive Advantages Competitive Disadvantages

Relative to GDP per Capita Relative to GDP per Capita
Average Ranking Average Ranking
General Internet Use 34 Judicial Independence 55
Availability of Cellular Phones 36 Quality of Public Schools 55
Extent of Distorting 36 Venture Capital Availability 55
Government Subsidies
National Technology Position 54
Quality of Business Schools 39
Buyer Sophistication 54
Consumer Adoption of 54
Latest Products
Demanding Regulatory Standards 54
Administrative Burden for 54
Start-ups
Business Information Availability 54

Note: Simple average of rankings for five Andean countries; average country ranking for this group is 53 (out of 58)
Source: Porter, Michael E. “The Current Competitiveness Index: Measuring the Microeconomic Foundations of Prosperity,” The Global
Competitiveness Report 2000. New York: Oxford University Press, 2000
ACP Steering Committee 06-21-01 CK 21 Copyright © 2001 Professor Michael E. Porter
 Company Operations and Strategy

Operational Strategic
Effectiveness Positioning

• Assimilating, attaining, and • Creating a unique and

extending best practice sustainable competitive
position

Do the same thing better Compete in a different way

ACP Steering Committee 06-21-01 CK 22 Copyright © 2001 Professor Michael E. Porter

 Typical Company Strategies
in Developing Countries

Corporate
Corporate Direction
Direction Strategic
Strategic Positioning
Positioning Activities
Activities

•• Opportunistic,
Opportunistic, pursuing
pursuing •• Wide
Wide product
product line
line •• Emphasize
Emphasize
profitable
profitable opportunities
opportunities in
in serving
serving all
all local
local manufacturing
manufacturing activities
activities
whatever
whatever area
area they
they arise
arise industry
industry segments
segments in
in the
the value
value chain
chain
•• Take
Take advantage
advantage of
of •• Compete
Compete mainly
mainly on
on price
price •• Low
Low investment
investment inin
government
government •• Imitate machinery,
machinery, equipment,
equipment,
Imitate offerings
offerings of
of
relationships
relationships and
and foreign brands,
brands, R&D,
R&D, or
or training
training
foreign and
and other
other
concessions
concessions domestic
domestic companies
companies •• Foreign
Foreign partners
partners provide
provide
•• Create
Create conglomerate
conglomerate •• Rely many
many inputs,
inputs, know
know how,
how,
Rely on
on low
low wage
wage rates
rates
business
business groups
groups with
with and and
and financing
financing
and cheap
cheap natural
natural
overall
overall scale
scale and
and resources
resources asas competitive
competitive •• Financing
Financing via
via short-term
short-term
operations
operations in
in disparate
disparate advantages bank
advantages bank borrowing
borrowing
areas
areas

ACP Steering Committee 06-21-01 CK 23 Copyright © 2001 Professor Michael E. Porter

 Company Operations and Strategy
Position of Andean Countries

Competitive Advantages Competitive Disadvantages

Relative to GDP per Capita Relative to GDP per Capita
Average Ranking Average Ranking

Extent of Branding 44 Value Chain Presence 54

Senior Management Recruitment 44 Control of International 53
Distribution
Extent of Regional Sales 46
Company Spending on R&D 53
Production Processes 51
Licensing of Foreign Technology 51

Note: Simple average of rankings for five Andean countries; average country ranking for this group is 53 (out of 58)
Source: Porter, Michael E. “The Current Competitiveness Index: Measuring the Microeconomic Foundations of Prosperity,” The Global
Competitiveness Report 2000. New York: Oxford University Press, 2000
ACP Steering Committee 06-21-01 CK 24 Copyright © 2001 Professor Michael E. Porter
 Internationalization from Developing Countries
Beyond Inherited Resources

Inherited Skills in exploiting Created

comparative comparative competitive
advantage advantage advantage

• Exploit the home • Utilize skills in exploiting • Create firm-specific

country’s natural natural resources / competitive advantage
resources and abundant labor supply in products,
supply of low-cost to expand into other processes, or
labor resource-rich countries marketing
• Export primarily to • Foreign investment in • Export and foreign
advanced other resource-rich investment to other
countries countries developing countries,
especially neighbors
• Sales primarily to • Exports to focused
advanced countries segments of advanced
economies

Source: Draws on Arturo, Condo “Internationalization of Firms Based in Developing Countries.” Ph.D. dissertation, Harvard Business School, Boston, 2000.
ACP Steering Committee 06-21-01 CK 25 Copyright © 2001 Professor Michael E. Porter
 Internationalization Strategy
Hilasal, El Salvador
Set
Set of
of Particular
Particular
Activities
Activities Product
Product Variety
Variety

•• Highly
Highly customized
customized products
products withwith rapid
rapid delivery
delivery •• High
High quality,
quality, fashionable
fashionable printed
printed towels
towels
•• R&D
R&D located
located at
at production
production sitessites to
to enable
enable rapid
rapid designed
designed for
for global
global markets
markets
implementation of textile technology improvements
implementation of textile technology improvements
•• Design
Design groups
groups for
for fast
fast response
response to to custom
custom orders
orders
•• Bilingual
Bilingual sales
sales office
office based
based in in Miami
Miami
•• Manufacturing
Manufacturing located
located in in El
El Salvador
Salvador and and Mexico
Mexico
to minimize costs while maintaining close
to minimize costs while maintaining close access access
to
to U.S.
U.S. market
market
•• State-of-the-art
State-of-the-art computer
computer systems
systems to to track
track
customer orders from design to
customer orders from design to shipping shipping
•• Highest
Highest quality
quality machinery,
machinery, equipment,
equipment, cotton,
cotton, and
and
dyes
dyes sourced
sourced from
from Europe
Europe and and the
the U.S.
U.S.

• Firm-based competitive advantage

• Hilasal developed a successful differentiation-based positioning

Source: Draws on research conducted by Harvard Business School students M. Collardin, F. Cueto, J. Encinar, A. Gonzalez, A. Kulyk, and D. Smith, April 1997
ACP Steering Committee 06-21-01 CK 26 Copyright © 2001 Professor Michael E. Porter
 Geographic Levels and Competitiveness

Groups
Groupsofof
Neighboring e.g., Andean
Neighboring
Nations
Nations

Nations e.g., Bolivia, Ecuador

Nations

States, e.g., Vichada (Colombia),

States,Counties,
Counties, Monagas (Venezuela)
Departments
Departments

Metropolitan
Metropolitan e.g., Bogotá (Colombia),
Areas
Areas Trujillo (Perú)

Cities e.g., Cuenca (Ecuador),

Cities/ /
Towns Cajamarca (Perú)
Towns

ACP Steering Committee 06-21-01 CK 27 Copyright © 2001 Professor Michael E. Porter

 The Mutual Dependence of Nations and Regions

• A nation’s economic growth and prosperity can be greatly

enhanced by a healthy regional economy
- Large, accessible markets for exports and foreign investment
- Nations become far more attractive as places to invest
- Nations can focus on their unique strengths

• A nation will inevitably suffer if it is isolated or an island amid

countries that are not prospering

• A nation’s productivity can be greatly enhanced by regional

coordination versus unilateral action

ACP Steering Committee 06-21-01 CK 28 Copyright © 2001 Professor Michael E. Porter

 Regional Strategy and Competitiveness
Traditional View
• Regions as free trade zones

New View
• A regional strategy as a powerful tool to enhance competitiveness in each
of the countries
- Gains from internal trade and investment
and
- Policy coordination that creates mutual benefits to productivity in all
countries. Harness economies of specialization and externalities
across borders in infrastructure, regulation, and other areas
- A powerful lever for speeding up the process of economic upgrading at
the national level
- A lever for promoting interest and investment in the region by the
international community

ACP Steering Committee 06-21-01 CK 29 Copyright © 2001 Professor Michael E. Porter

 Regional Economic Coordination
Illustrative Policy Levers

Factor
Factor Context
Contextfor
for Related
Relatedand
and
Demand
Demand Regional
Regional
(Input)
(Input) Strategy
Strategy Supporting
Supporting
Conditions
Conditions Governance
Governance
Conditions
Conditions and
andRivalry
Rivalry Industries
Industries

• Improve regional • Coordinate • Agree on foreign • Set minimum • Establish ongoing • Share best
transportation macroecono- investment environmental upgrading process practices in
infrastructure mic policies promotion standards in clusters that government
guidelines to limit cross national operations
• Create an efficient • Eliminate trade • Set minimum
forms of borders, e.g.
energy network and safety • Improve regional
investment
investment standards – Tourism institutions
• Upgrade/link regional promotion that do
barriers within – Regional
communications not enhance • Establish – Agribusiness development
the region
productivity reciprocal bank
• Upgrade/link – Textiles and
• Simplify cross- consumer – Dispute
financial markets • Coordinated Apparel
border protection laws resolution
competition
• Upgrade higher regulations and – Information mechanisms
policy
education through paperwork Technology – Policy
facilitating coordination
• Guarantee
specialization and body
minimum basic
student exchanges
investor • Develop a
• Expand cross-border protections regional
business and financial marketing
information access strategy
and sharing
• Coordinate activities to
ensure personal
safety
ACP Steering Committee 06-21-01 CK 30 Copyright © 2001 Professor Michael E. Porter
 Process of Economic Reform
Guidelines

• Forge strong commitment across political and economic groups

• Pursue macro and microeconomic reforms in parallel
• Create economic strategies at multiple geographic levels (e.g. cities,
states, and national), pushing responsibilities to the local level
• Tie social and economic reforms together
• Create institutions that provide continuity and shelter reforms from
politics
- Independent institutions like the Central Bank
- Private-sector led competitiveness councils that include government officials
- Independent think-tanks to collect and publish benchmarking information
- Cluster trade associations
• Utilize externally focused approaches to insulate reform from internal
pressures
- Cross-national economic strategy
- Dollarization / Currency Zones
- Relationships with international organizations

ACP Steering Committee 06-21-01 CK 31 Copyright © 2001 Professor Michael E. Porter

 Stages of Economic Reform
Stage
Stage 11
• Macroeconomic stabilization
• Privatization of government-
owned companies
• Opening of the economy to
international trade and
investment (external
competition)
• Financial market reform and
opening
ACP Steering Committee 06-21-01 CK
Stage
Stage 22
• Upgrading the microeconomic
business environment
• Unleashing internal
competition
• Development of cluster-
specific skills, infrastructure,
supporting industries, and
related institutions
32 Copyright © 2001 Professor Michael E. Porter