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- 1. 1 Copyright 2010 © Professor Michael E. Porter Professor Michael E. Porter Harvard Business School Urubamba, Peru November 12, 2010 This presentation draws on ideas from Professor Porter’s 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 means—electronic, mechanical, photocopying, recording, or otherwise—without 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, 2009 A Strategy for Sustaining Growth and Prosperity for Peru
- 2. 2 Copyright 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
- 3. 3 $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Peru’s Prosperity Performance 1950-2009 Note: PPP using Geary Khamis calculation methodology. Source: Groningen Growth and Development Centre, Total Economy Database (June 2009) GDP per Capita (in 1990 PPP US$) CAGR: +2.07% CAGR: +4.41% CAGR: - 0.73% 2009
- 4. 4 Prosperity Performance Selected Countries, 1999 to 2009 Source: EIU (2010), authors calculations PPP-adjusted GDP per Capita, 2009 ($USD) Growth of Real GDP per Capita (PPP-adjusted), CAGR, 1999 to 2009 Argentina Belize Bolivia Brazil Canada ($37,840) Chile Colombia Costa Rica Cuba Dominican Republic Ecuador El Salvador Guatemala Haiti Honduras Jamaica Mexico Nicaragua Panama Paraguay Peru Trinidad & Tobago United States ($46,460) Uruguay Venezuela Cambodia China India Indonesia Laos Malaysia Philippines Russia Thailand Vietnam $ 0 $ 2,000 $ 4,000 $ 6,000 $ 8,000 $ 10,000 $ 12,000 $ 14,000 $ 16,000 $ 18,000 $ 20,000 0% 2% 4% 6% 8% 10% 12% 14%
- 5. 5 Copyright 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 • Sound macroeconomic policies since the mid 1990s, trade opening and a supportive international economic environment have allowed the country to prosper
- 6. 6 Export Intensity Selected CountriesExports as % GDP, 2009 Source: EIU (2010) Change of Exports as Share of GDP, 1999 to 2009 Argentina Belize Bolivia Brazil Canada Chile Colombia Costa Rica Cuba Dominican Republic Ecuador El Salvador Guatemala Haiti Honduras Jamaica Mexico Nicaragua Panama Paraguay Peru Trinidad & Tobago USA Uruguay Venezuela Cambodia Indonesia Thailand Vietnam China India Russia 0% 10% 20% 30% 40% 50% 60% 70% 80% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25%
- 7. 7 Copyright 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 • 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 pre- condition for these achievements HOWEVER • Growth has been highly heterogeneous across different segments of society and different parts of the country
- 8. 8 Unemployment Performance Selected CountriesUnemployment Rate, 2009 Change of Unemployment Rate in Percentage Points, 1999-2009 Source: EIU (2010) DeterioratingImproving Argentina Bolivia Brazil Canada Chile Colombia Costa Rica Cuba Dominican Republic Ecuador El Salvador Honduras Jamaica Mexico Nicaragua Panama Paraguay Peru Trinidad & Tobago United States UruguayVenezuela China India Indonesia Malaysia Philippines Russia Thailand Vietnam 0% 2% 4% 6% 8% 10% 12% 14% 16% -10% -8% -6% -4% -2% 0% 2% 4% 6%
- 9. 9 Poverty Rates Peru, 2001 to 2009% of Population Under the Poverty Line 0% 10% 20% 30% 40% 50% 60% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Informacion Socio Demografica, from El Instituto Nacional de Estadistica e Informatica (INEI), 2010
- 10. 10 Regional Poverty Rates Peru, 2004 to 2009 % of Population Under the Poverty Line 0% 10% 20% 30% 40% 50% 60% 70% 2004 2005 2006 2007 2008 2009 Coast Sierra Lowlands Source: Informacion Socio Demografica, from El Instituto Nacional de Estadistica e Informatica (INEI), 2010
- 11. 11 Copyright 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 • 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 pre- condition 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
- 12. 12 Export Intensity and Size Selected Countries Exports as % GDP, 2009 Source: World Bank (2010) GDP $Billions, 2009 (log scale) Argentina Bolivia Brazil Chile Colombia Costa Rica Dominican Republic Ecuador El Salvador Guatemala Haiti Honduras Mexico Panama Paraguay Trinidad and Tobago Uruguay Venezuela, RB China Malaysia Indonesia Russia Canada United States India - 20 40 60 80 100 120 140 1,00010 10,0001001 Peru
- 13. 13 2009: $20 billion Peru’s Export Composition by SITC categories 1962-2009 * In 2009 dollars. Note: Showing standard SITC rev. 1 categories, goods only. Source: UN Comtrade; authors’ analysis 1962: $4 billion* Crude materials, inedible, except fuels Food and live animals 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
- 14. 14 Peru’s Exports By Type of Industry 0.00% 0.10% 0.20% 0.30% 0.40% 0.50% 0.60% 0.70% 0.80% 0.90% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Processed Goods Semi-processed Goods Unprocessed Goods Services TOTAL World Export Market Share (current USD) 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.
- 15. 15 Copyright 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 • 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 pre- condition 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
- 16. 16 Inbound Foreign Investment Stocks and Flows, Selected Countries Source: UNCTAD, World Investment Report (2009). Inbound FDI Stocks as % of GDP, Average 1998-2008 FDI Inflows as % of Gross Fixed Capital Formation, Average 1998 - 2008 Argentina Belize Bolivia Brazil Canada Chile Colombia Costa Rica Cuba Dominican Republic Ecuador El SalvadorGuatemala Haiti Honduras Jamaica Mexico Nicaragua Panama Paraguay Peru Trinidad and Tobago United States Uruguay Venezuela Cambodia Indonesia Laos Malaysia Philippines Thailand Vietnam China India Russia 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
- 17. 17 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 -30% -20% -10% 0% 10% 20% 30% 40% Source: USPTO, World Bank Average U.S. patents per million population, 2005 – 2009 CAGR of US-registered patents, 2005 – 2009 Innovative Capacity Innovation Output of Selected Countries Saudi Arabia Russia Portugal Turkey India Poland China South Africa Greece 170 patents = Argentina Brazil Croatia Lithuania Philippines Ecuador Chile ThailandPeru Venezuela Mexico Colombia Ukraine Estonia Costa Rica Uruguay Kazakhstan KenyaEgypt Latvia United Arab Emirates
- 18. 18 Copyright 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 • 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 pre- condition 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 country’s unique competitive advantages
- 19. 19 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
- 20. 20 Structure of the Project Advisory Board Joint Peruvian and Boston Team Macroeconomic Competitiveness Group Business Environment Group Cluster Development Group Organizational Structure Group •Tax Reform •Security •Health Reform •Education •Financial •Innovation •Infrastructure •Labor •Energy •Water Resources •Ease of Doing Business •Metal-Mechanic Cluster •Institutional Strengthening
- 21. Executive Opinion Survey City Sample Size Lima 160 Arequipa 80 Chiclayo 80 Cusco 80 Trujillo 80 Iquitos 71 TOTAL 551 • 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 $500,000 in sales
- 22. 22 Copyright 2010 © Professor Michael E. Porter20100915 – Peru.ppt What is Competitiveness? • Only competitive businesses can create wealth and jobs • Nations compete to offer the most productive environment for business • The public and private sectors play different but interrelated roles in creating a productive economy • Competitiveness depends on the productivity with which a nation uses its human, capital, and natural resources. – Productivity sets the sustainable standard of living (wages, returns on capital, returns on natural resources) – It is not what industries a nation competes in that matters for prosperity, but how productively it competes in those industries – Productivity in a national economy arises from a combination of domestic and foreign firms – The productivity of “local” or domestic industries is fundamental to competitiveness, not just that of export industries
- 23. 23 Copyright 2010 © Professor Michael E. Porter20100915 – Peru.ppt Labor Productivity Selected Countries, 1999 to 2009 Growth of real GDP per employee (PPP-adjusted), 1999 to 2009 Real GDP per employee (PPP adjusted US$), 2009 Source: authors calculation Groningen Growth and Development Centre (2010) Argentina Bolivia Brazil Canada Chile Colombia Ecuador Mexico Peru UnitedStates Uruguay Venezuela Cambodia Indonesia Malaysia Philippines Thailand Vietnam China India Russia $0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 -2% 0% 2% 4% 6% 8% 10% 12%
- 24. 24 Copyright 2010 © Professor Michael E. Porter Macroeconomic Competitiveness Microeconomic Competitiveness Sophistication of Company Operations and Strategy Quality of the National Business Environment Macroeconomic Policies Social Infrastructure and Political Institutions State of Cluster Development • 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 competition Determinants of Competitiveness Endowments
- 25. 25 Peru's Endowments Natural Resources Geographic Location Cultural Legacy •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 •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
- 26. 26 Copyright 2010 © Professor Michael E. Porter Macroeconomic Competitiveness Microeconomic Competitiveness Sophistication of Company Operations and Strategy Quality of the National Business Environment Macroeconomic Policies Social Infrastructure and Political Institutions State of Cluster Development • 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 competition Determinants of Competitiveness Endowments
- 27. 27 Copyright 2010 © Professor Michael E. Porter Macroeconomic Competitiveness • • Human development – Basic education – Health system • Political institutions – Political freedom – Voice and accountability – Political stability – Government effectiveness – Centralization of economic policymaking • Rule of law – Security – Judicial independence – Efficiency of legal framework – Business costs of corruption – Civil rights • • Fiscal policy – Government surplus/deficit – Government debt • Monetary policy – Inflation Social Infrastructure and Political Institutions Macroeconomic Policies
- 28. 28 Copyright 2010 © Professor Michael E. Porter20100915 – Peru.ppt Competitiveness and Poverty Reduction 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 Economic Development
- 29. 29 Copyright 2010 © Professor Michael E. Porter Macroeconomic Competitiveness Microeconomic Competitiveness Sophistication of Company Operations and Strategy Quality of the National Business Environment Social Infrastructure and Political Institutions State of Cluster Development Endowments Macroeconomic Policies Determinants of Competitiveness • The internal skills, capabilities, and management practices needed for companies to attain the highest level of productivity and innovation possible Sophistication of Company Operations and Strategy
- 30. 30 Copyright 2010 © Professor Michael E. Porter Determinants of Competitiveness • The external business environment conditions that allow companies to reach high levels of productivity and innovation Quality of the National Business Environment Macroeconomic Competitiveness Microeconomic Competitiveness Sophistication of Company Operations and Strategy Quality of the National Business Environment Social Infrastructure and Political Institutions State of Cluster Development Endowments Macroeconomic Policies
- 31. 31 Copyright 2010 © Professor Michael E. Porter Quality of the National Business Environment Context for Firm Strategy and Rivalry Related and Supporting Industries Factor (Input) Conditions Demand Conditions • Sophisticated and demanding local customers and needs • 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 competing • Local rules and incentives that encourage investment and productivity Open and vigorous local competition • Access to high quality business inputs • Availability of suppliers and supporting industries
- 32. 32 Copyright 2010 © Professor Michael E. Porter20100915 – Peru.ppt Determinants of Competitiveness • A geographic concentration of firms, specialized assets, and institutions in particular fields. State of Cluster Development Macroeconomic Competitiveness Microeconomic Competitiveness Sophistication of Company Operations and Strategy Quality of the National Business Environment Social Infrastructure and Political Institutions State of Cluster Development Endowments Macroeconomic Policies
- 33. Accommodations (hotels, hostels, lodges) Institutions for Collaboration Educational and Research Institutions Marketing Agencies Banking Services / Foreign Exchange Crafts Restoration/ conservation Local retail and other services (Internet cafes, etc.) Maintenance Services Food Suppliers Property Services Food Cluster Hospitality equipment suppliers Health Cluster Source: Adapted from HBS student project, 2010 “Peru Tourism Cluster”; Agung, Anand, Bhardan, Ilanos, Nosher Cusco Tourism Cluster Transport (land, air, rail and river) Restaurants Attractions and activities (e.g. National Parks, cultural shows) Government Agencies Related clusters Travel Agents Tour Operators
- 34. 34 Copyright 2009 © Professor Michael E. PorterCompetitiveness Master - 2009-04-20.ppt 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
- 35. 35 Copyright 2009 © Professor Michael E. PorterCompetitiveness Master - 2009-04-20.ppt Furniture Building Fixtures, Equipment & Services Fishing & Fishing Products Hospitality & TourismAgricultural Products Transportation & Logistics Clusters and Economic Diversification Linkages Across Clusters Plastics Oil & Gas Chemical Products Biopharma- ceuticals Power Generation Aerospace Vehicles & Defense Lightning & Electrical Equipment Financial Services Publishing & Printing Entertainment Information Tech. Communi- cations Equipment Aerospace Engines Business Services Distribution Services Forest Products Heavy Construction Services Construction Materials Prefabricated Enclosures Heavy Machinery Sporting & Recreation Goods Automotive Production Technology Motor Driven Products Mining & Metal Manufacturing Jewelry & Precious Metals Textiles Footwear Processed Food Tobacco Medical Devices Analytical InstrumentsEducation & Knowledge Creation Note: Clusters with overlapping borders or identical shading have at least 20% overlap (by number of industries) in both directions. Apparel Leather & Related Products
- 36. 36 Copyright 2010 © Professor Michael E. PorterCompetitiveness Master - 2009-04-20.ppt Stages of National Competitive Development Shifting Policy Imperatives Factor-Driven Economy Investment- Driven Economy Innovation- Driven Economy Source: Porter, Michael E., The Competitive Advantage of Nations, Macmillan Press, 1990 Low Cost Inputs Productivity Unique Value • Macro, political, and legal stability • Improving human capital • Efficient basic infrastructure • Lowering regulatory costs of doing business • Increasing local rivalry • Market opening • Advanced infrastructure • Incentives and rules encouraging productivity • Cluster formation and activation • Advanced skills • Scientific and technological institutions • Incentives and rules encouraging innovation • Cluster upgrading
- 37. 37 Macroeconomic Policy: Assessment • Sound policies have allowed Peru’s 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 • Peru’s 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 credit
- 38. 38 Political Institutions: Assessment Corruption • 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
- 39. 39 Copyright 2010 © Professor Michael E. Porter Corruption Perception Index, 2009 Note: Ranks only countries available in both years (131 countries total) Source: Global Corruption Report, 2009 Change in Rank, Global Corruption Report, 2009 versus 2003 Rank in Global Corruption Index, 2009 Deteriorating Improving High corruption Low corruption Canada USA Chile Uruguay Cuba Trinidad and Tobago Costa Rica Brazil El Salvador Peru, Colombia Mexico Panama Dominican Republic Nicaragua Argentina Guatemala Venezuela Bolivia Honduras Ecuador Paraguay China India Russia
- 40. 40 Political Institutions: Assessment Corruption • 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
- 41. 41 Social Infrastructure: Assessment Education • 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
- 42. Assessment: Peru’s Business Environment Context for Firm Strategy and Rivalry Related and Supporting Industries Factor (Input) Conditions Demand Conditions + Improving consumer protection regulation ± Improving sophistication of local buyers – Weak environmental standards enforcement + Openness to foreign investment, trade, capital flows + Improvements in investor protections ± Efforts to strengthen competition policy – Rigidity of employment – Difficulty in business formation – Low intensity of local competition – High Informality of the economy+ Abundant resources: mineral, agricultural, fishing, and cultural + Advantageous location + Improving administrative infrastructure + Simplified customs procedures ± Sound banking system, but high interest spreads ± Improving financial markets, but limited venture capital availability – Poor physical infrastructure – Low skill levels in the labor force, mismatch with demand – Weak university-industry research collaboration – Few high-quality research and scientific institutions – Limited local suppliers and supporting industries – Shallow clusters
- 43. Factor input conditions in Peru lag regional peers, particularly in physical infrastructure. Administrative infrastructure • Peru has made important reforms in simplifying administrative procedures Factor (Input) Conditions
- 44. 44 Copyright 2010 © Professor Michael E. Porter20100915 – Peru.ppt Peru: 36 Colombia: 39 Ecuador: 130 Venezuela: 172 Uruguay: 124 Brazil: 127 Argentina: 115 Chile: 43 Bolivia: 149 Paraguay: 106 Guyana: 100 Suriname: 161 Ease of Doing Business South America, 2011 Source: The World Bank, Doing Business (2011), 183 countries
- 45. 45 Copyright 2010 © Professor Michael E. Porter20100915 – Peru.ppt 0 20 40 60 80 100 120 Ease of Doing Business Getting Credit Protecting Investors Registering Property Trading Across Borders Starting a Business Paying Taxes Closing a Business Dealing with Construction Permits Enforcing Contracts Ease of Doing Business Peru, 2011Ranking, 2011 (of 183 countries) Source: The World Bank, Doing Business (2011), GDP rank on GDP per capita, ppp-adjusted Favorable Unfavorable Peru’s per capita GDP rank: 81
- 46. 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 • Peru’s science and technology infrastructure is very weak. Factor (Input) Conditions
- 47. Foreign trade and investment policy • Since the early 1990s, Peru’s 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 • Peru’s 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 Barriers to trade and investment have been reduced, but labor market efficiency and local rivalry remain limited Context for Firm Strategy and Rivalry
- 48. Local demand sophistication Economic 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 standards Regulations 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 Peruvian consumer sophistication is increasing. Consumer protection and environmental regulations are in place but not well enforced Demand Conditions
- 49. Export industries • Peru’s 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 Availability of suppliers and supporting industries remains low, and Peruvian clusters are shallow Related and Supporting Industries
- 50. 50 Copyright 2010 © Professor Michael E. Porter 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% -0.5% 0.0% 0.5% 1.0% 1.5% Peru’s National Export Portfolio 1997 to 2009 Change in Peru’s world export market share, 1997 to 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. Peru’sworldexportmarketshare,2009 Change In Peru’s Overall World Export Share: +0.09% Peru’s Average World Export Share: 0.22% Exports of US$2 Billion = Fishing and Fishing ProductsAgricultural Products Communications Services Jewelry and Precious Metals Metal, Mining and Manufacturing ApparelFinancial Services Publishing and Printing Hospitality and Tourism
- 51. 51 Copyright 2010 © Professor Michael E. Porter 0.00% 0.02% 0.04% 0.06% 0.08% 0.10% 0.12% 0.14% -0.02% -0.01% 0.00% 0.01% 0.02% 0.03% 0.04% 0.05% 0.06% 0.07% 0.08% Peru’s National Export Portfolio 1997 to 2009 Change in Peru’s world export market share, 1997 to 2009 Note: Showing clusters with greater than $10 mil exports. Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, HBS; Richard Bryden, Project Director. Peru’sworldexportmarketshare,2009 Exports of US$2 Billion = Oil and Gas Products and Services Plastics Transportation and Logistics Furniture Textiles Construction Materials Processed Food Chemical Products Forest ProductsLeather and Related Products Business Services Heavy Machinery Prefabricated Enclosures and Structures Power and Power Generation Equipment Footwear Motor Driven Products Production Technology Communications Equipment Biopharmaceuticals Building Fixtures and Equipment Automotive
- 52. 52 Copyright 2010 © Professor Michael E. Porter Furniture Building Fixtures, Equipment & Services Fishing & Fishing Products Hospitality & Tourism Agricultural Products Transportation & Logistics Share of World Exports by Cluster Peru, 2008 Plastics Oil & Gas Chemical Products Biopharma- ceuticals Power Generation Aerospace Vehicles & Defense Lightning & Electrical Equipment Financial Services Publishing & Printing Information Tech. Communi- cations Equipment Business Services Distribution Services Forest Products Heavy Construction Services Construction Materials Prefabricated Enclosures Apparel Leather & Related Products Jewelry & Precious Metals Textiles Footwear Processed Food Tobacco Medical Devices Analytical InstrumentsEducation & Knowledge Creation Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions. Marine Equipment Aerospace Engines Heavy Machinery Sporting & Recreation Goods Automotive Production Technology Motor Driven Products Mining & Metal Manufacturing 0.2% - 0.5% 0.5% - 1.0% 0.95% - 1.9% Enter- tainment World Market Share
- 53. 53 Specialization in Peru’s Regions Selected Examples La Libertad (El Porvenir, Trujillo) Leather, Footwear Lima (La Victoria) Apparel Puno and Arequipa Apparel from Alpaca Cuzco Tourism Cajamarca (Bambamarca) Dairy, Processed Foods Ancash (Chimbote) Fishing and Fish Products Ica Wine Lima (Infantas, Los Olivos) Metal Manufacturing, Metal Furniture Piura Agricultural Products: Mangoes, Lemons, Brown Sugar Syrup
- 54. 54 Copyright 2010 © Professor Michael E. Porter Assessment: Peruvian Clusters • Peru’s 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 • Peru’s 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 development
- 55. 55 Copyright 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
- 56. 56 Copyright 2010 © Professor Michael E. Porter National Value Proposition Creating and Economic Strategy Developing Unique Strengths Achieving and Maintaining Parity with Peers • What elements of the business environment can be unique strengths relative to peers/neighbors? • What existing and emerging clusters represent local strengths? • What weaknesses must be addressed to remove key constraints and achieve parity with peer countries? • 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? • Priorities and sequencing are necessity in economic development
- 57. 57 Copyright 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
- 58. 58 Copyright 2010 © Professor Michael E. Porter Peru's Competitiveness Strategy National Value Proposition Implementation Plan Goals Action Agenda
- 59. 59 Copyright 2010 © Professor Michael E. Porter What is Unique about Peru? Towards a Peruvian Value Proposition 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
- 60. 60 Copyright 2010 © Professor Michael E. Porter Towards a Peruvian Value Proposition Enhanced the Sophistication of Endowment Related Exports A hub for trade between Latin America, Asia, and North America Dynamic regional development with vibrant clusters A secure, neutral and peaceful country Improve Cross-Cutting Policies Preserving Natural and Cultural Resources
- 61. 61 Copyright 2010 © Professor Michael E. Porter National Value Proposition: A secure, neutral and peaceful country Reduce corruption to fight informality and inequality Empower security institutions and foster links with local communities Break the cycle of drug trafficking and insurgency Develop regional clusters to generate a stronger link between the growth process and new employment Peace 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. A secure, neutral and peaceful country
- 62. 62 Copyright 2010 © Professor Michael E. Porter Enhanced the Sophistication of Endowment Related Exports •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 Peru’s endowments have attracted significant interest from foreign and domestic investors already in the past. Peru must create higher value from its endowments driven clusters. National Value Proposition: Utilizing Endowments
- 63. 63 Copyright 2010 © Professor Michael E. Porter National Value Proposition: A Trade Hub Maintain and extend low trade barriers Improve the efficiency and quality of trade enabling regulation and infrastructure. Mobilize and develop clusters of trade related services including logistics and finance Peru’s 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 A hub for trade between Latin America, Asia, and North America
- 64. 64 Copyright 2010 © Professor Michael E. Porter National Value Proposition: Decentralization Build unique regional economies based on local strengths. Upgrade key weaknesses including regional education, regulatory conditions, and infrastructure Strengthen regions through upgrading regional institutions Peru’s 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. Dynamic regional development with vibrant clusters
- 65. Molds Financial Agriculture Electricity companies Foundries Lima metalworking cluster: Example of a Cluster Development Initiative Plastics Design shops Metals Paints and chemicals Services (lab, etc) Software / IT Technology transfer Plastics Mining Automotive Restaurants Appliances Logistics Packaging Advisory services Security Equipment (electrical, mining, etc) Tools Recycling Parts (isolators, etc) Custom services Government Institutions Educational Institutions Business Institutions Multilateral Institutions
- 66. 66 Copyright 2010 © Professor Michael E. Porter Action Agenda A secure, neutral and peaceful country POLICIES •Sustain the security improvements against old and new threats • 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
- 67. 67 Copyright 2010 © Professor Michael E. Porter Secure, Neutral and Peaceful: Action Agenda Sustain 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 • Frame an institutional setting where a single institution concentrates efforts to fight drug trafficking and terrorist activities - Support 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. Specific Recommendations
- 68. 68 Copyright 2010 © Professor Michael E. Porter Secure, Neutral and Peaceful: Action Agenda Systematically 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 • 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 Specific Recommendations
- 69. 69 Copyright 2010 © Professor Michael E. Porter Action Agenda A hub for trade between Latin America, Asia and North America POLICIES •Focus efforts on becoming the springboard for South American firms seeking access to U.S. and Asian markets •Deepen free trade policies • 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
- 70. 70 Copyright 2010 © Professor Michael E. Porter Action Agenda Enhanced the Sophistication of Endowment Related Exports POLICIES •Transform endowment-based industries into broad clusters • Launch an ambitious cluster development program •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
- 71. 71 Copyright 2010 © Professor Michael E. Porter Action Agenda Dynamic regionalized development with vibrant clusters POLICIES • Design a modern policy for regional development • Devise a strategy for each region based on its unique attributes and strengths • 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
- 72. 72 Copyright 2010 © Professor Michael E. Porter •Sustain path of sound macroeconomic policy •Ensure adequate basic education and health care •Focus 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 capital •Increase financial-sector competition and access to capital •Encourage the development of new financial instruments •Develop science and technology capabilities •Expand university-business collaboration •Encourage industry to absorb and improve foreign technology •Involve talented expatriate professionals •Improve innovation infrastructure •Improve the effectiveness of the government Improve Cross Cutting Policies
- 73. 73 Copyright 2010 © Professor Michael E. Porter Income 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 Eleven Goals for 2021
- 74. 74 Copyright 2010 © Professor Michael E. Porter $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 2021 Peru will be in the upper tier of middle-income countries with an income per capita of $10,000 Note: PPP using Geary Khamis calculation methodology. Source: Groningen Growth and Development Centre, Total Economy Database GDP per Capita (in 1990 PPP US$) PAST PRESENT GOAL
- 75. 75 Copyright 2010 © Professor Michael E. Porter % of Population Under the Poverty Line Source: Compendio Estadístico, Instituto Nacional de Estadistica e Informatica (INEI), 2010; own projections PAST PRESENT Peru will reduce its poverty level to 20 percent GOAL
- 76. 76 Copyright 2010 © Professor Michael E. Porter Total trade (USD millions) PAST PRESENT Peru will be one of the top two South American countries in volume of trade with Asia GOAL Source: Trade Map from official sources (http://trademap.org) ; own projections
- 77. 77 Copyright 2010 © Professor Michael E. Porter FDI Inflows (USD millions) Source: UNCTADSTAT (http://unctadstat.unctad.org); own projections PAST PRESENT Peru will be the first-ranked recipient of foreign direct investment among the countries along the South American Pacific coast GOAL
- 78. 78 Copyright 2010 © Professor Michael E. Porter 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 Eleven Goals for 2021
- 79. 79 Copyright 2010 © Professor Michael E. Porter 0% 20% 40% 60% 80% 100% 120% 2000 2014 2018 2021 Peru will pass from the third to the second tier in the evaluation made by the OECD Program for International Student Assessment (PISA) Source: OECD Program for International Student Assessment (PISA) 2000. Authors calculations % of top countries (out of 65 countries) PAST GOAL
- 80. 80 Copyright 2010 © Professor Michael E. Porter 0% 10% 20% 30% 40% 50% 60% 70% 2006 2007 2008 2009 2010 2014 2018 2021 Peru will pass from "mid-level" to "low-level" for corruption in the region, as measured by Transparency International's Corruption Perceptions Index Source: Transparency Report. 2010 Corruption Perception Index. Authors calculations % of less corrupted countries (out of 180 countries) PAST TODAY GOAL
- 81. 81 Copyright 2010 © Professor Michael E. Porter Implementation Strategy: Sequencing of Policies • Financial system • Science and Technology • Maintain Government Policy Programs • Security • Anticorruption • Physical Infrastructure • Skills • Regional Development • Education and Health Care • Regional Development • Cluster Development Priority Immediate Long term
- 82. 82 Copyright 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)
- 83. 83 Copyright 2010 © Professor Michael E. Porter 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 country’s recent growth – Many dimensions of competitiveness remain weak and have to be improved • The proposed strategy outlined here offers an ambitious but realistic plan forward It defines clear priorities, identifies concrete action steps, and sets measurable objectives • Change will occur only if consensus builds within Peru • The process needs to continue