NITI Lectures

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); On Competition (Harvard Business Review, 2008);
and “Creating Shared Value” (Harvard Business Review, Jan 2011). 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. For
further materials, see the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu, and FSG website, www.fsg.org.
Competitiveness of Nations and Regions:
The New Learning
Professor Michael E. Porter
Harvard Business School
New Delhi,
May 25th, 2017

20170525—India Competitiveness Copyright 2017 © Professor Michael E. Porter
Armenia
Benin
Bhutan
Bolivia
Burkina
Faso
Burundi
Cambodia
CameroonCentral African Republic
(-3.8%, $505)
Chad
Comoros
Congo
(Brazzaville)
Congo (D.R.)
Côte d'Ivoire Djibouti
El Salvador
Eritrea
Ethiopia
Gambia
Georgia
Ghana
Guatemala
Guinea
Guinea-Bissau
Guyana
Haiti
Honduras
India
Kenya
Kyrgyz
Republic
Laos
Lesotho
Liberia
Madagascar
Malawi
Mali
Mauritania
Moldova
Morocco
Mozambique
Nepal
Niger
Nigeria
Pakistan
Papua New Guinea
Philippines
Rwanda
Samoa
São Tomé
and…
Senegal
Sierra
Leone
Solomon Islands
Sudan
Swaziland
Tajikistan
Tanzania
Uganda
Ukraine
Uzbekistan
Vanuatu
Vietnam
Zambia
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
-2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8%
PPP-Adjusted Real GDP
per Capita, 2016
($USD at 2005 prices)
Growth in Real GDP per Capita (PPP $US at 2005 prices), CAGR, 2006-2016
Bangladesh
Average Prosperity Growth: +2.9%
Prosperity Performance
Low and Lower Middle Income Countries
Source: EIU (2015), authors calculations.
Note: Low and Lower Middle Countries according to World Bank Income Groups based on GNI per capita.
Average Real GDP per
Capita: $3,671
High but Declining
Low and Declining
High and Improving
Low but Improving
2

• Competitiveness depends on the long-run productivity of a location
as a place for firms to do business
- Productivity of existing firms and workers
- High participation of citizens in the workforce
• Competitiveness is not:
- Low wages
- A weak currency
A nation or region is competitive to the extent that firms operating there
are able to compete successfully in the national and global economy
while maintaining and improving wages and living standards for the
average citizen
What is Competitiveness?
3
• Successful economic development requires improving competitiveness

The Dual Challenges of Development
• There is a powerful connection between economic
and social development
• Improving competitiveness requires improving
economic and social conditions simultaneously
Economic
Development
Social
Development
4

20170525—India Competitiveness Copyright 2017 © Professor Michael E. Porter5
India in 2017
• India has made significant economic progress over
the last few years, despite a challenging global context
− Robust growth of GDP, prosperity, and productivity
− Rising FDI inflows and exports
− Falling poverty
• Policy choices have begun to address some of India’s
deep-seated structural challenges
− Sustainability of macroeconomic policies
− Effectiveness of public programs
− Corruption
− Upgrading specific elements of the business
environment such as infrastructure, skills, business
regulations

The Path Ahead
•India has a promising future, but multiple
weaknesses and distortions remain that will
require time and determined action to overcome
– E.g. high informality, bureaucratic complexity, limited
access to capital, public education and infrastructure
deficits
•Reaching India’s full potential, both domestically
and in the global economy, requires:
– a shared understanding of competitiveness
– a coherent strategy
– excellence in implementation

Endowments
What Determines Competitiveness?
• Endowments, including natural resources, geographical location,
population, and land area, create a foundation for prosperity, but
true prosperity arises from productivity in the use of endowments
7

Endowments
Macroeconomic Competitiveness
Human Development
and Effective
Public Institutions
Sound Monetary
and Fiscal Policies
• Macroeconomic competitiveness sets the economy-wide
context for productivity to emerge, but is not sufficient to
ensure productivity
8

Sound Monetary
and Fiscal Policies
Endowments
Human Development
and Effective
Public Institutions
• Fiscal Policy:
Public spending aligned
with revenues over time
• Monetary Policy:
Low levels of inflation
• Economic
Stabilization: Avoiding
structural imbalances
and cyclical
overheating
Sound Monetary
and Fiscal Policies
9

• Human Development:
Basic education, health
care, equal opportunity
• Rule of Law:
Property rights, personal
security, and due process
• Government Institutions:
Stable and effective public
and governmental
organizations and
processes
Human Development
and Effective
Public Institutions
Endowments
Sound Monetary
and Fiscal Policies
Human Development
and Effective
Public Institutions
10

How Do We Measure Development
11
Economic
Development
GDP per Capita
Social
Progress

Social Progress Index Framework
Nutrition and Basic
Medical Care
Water and Sanitation
Shelter
Personal Safety
Personal Rights
Personal Freedom
and Choice
Inclusion
Access to Advanced
Education
Basic Human Needs Foundations of Wellbeing Opportunity
Social Progress Index
Access to Basic
Knowledge
Access to Information
and Communications
Health and Wellness
Environmental Quality

Social Progress 2005-2016
2005 2016
13

Microeconomic Competitiveness
Sophistication
of Company
Operations and
Strategy
Quality of the
Business
Environment
State of Cluster
Development
Endowments
Human Development
and Effective
Public Institutions
Sound Monetary
and Fiscal Policies
• Productivity ultimately depends on improving the
microeconomic capability of the economy
• Many things matter; there is no silver bullet
14

The internal skills,
capabilities, and
management
practices that enable
companies to
achieve higher levels
of productivity and
innovationMacroeconomic Competitiveness
Sophistication
of Company
Operations and
Strategy
Quality of the
National
Business
Environment
State of Cluster
Development
Endowments
Human Development
and Effective
Public Institutions
Sound Monetary
and Fiscal Policies
15

The quality of the
business
environment that
supports company
productivity,
innovation, and
growth
Sophistication
of Company
Operations and
Strategy
Quality of the
National
Business
Environment
State of Cluster
Development
Endowments
Human Development
and Effective
Public Institutions
Sound Monetary
and Fiscal Policies
16

Context
for Firm
Strategy
and Rivalry
Related and
Supporting
Industries
Factor
(Input)
Conditions
Demand
Conditions
• Sophisticated and demanding local
needs
– e.g., Sophisticated demand in the
private sector and government
– Strict quality, safety, and
environmental standards
• Many things in the business environment 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
– e.g. incentives for capital investment,
IP protection
– Sound corporate governance
and accountability
• Open and vigorous local competition
− Openness to competition
− Strict competition laws
• Improving access to high quality
business inputs
– Qualified human resources
– Capital availability
– Physical infrastructure
– Scientific and technological
infrastructure
– Administrative and regulatory
infrastructure • Availability and quality of suppliers and
supporting industries
Improving the Quality of the Business Environment
The Diamond Model
17

Improving the National Business Environment
Peru, 2012
+ Abundant resources: mineral, agricultural,
fishing, and cultural
+ Advantageous location
+ Improving administrative infrastructure
± Sound banking system, but high interest
spreads and 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
+ Improving consumer protection
regulation
± Improving sophistication of local buyers
− Weak environmental standards
enforcement
– Limited local suppliers and
supporting industries
– Shallow clusters
+ 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
Context
for Firm
Strategy
and Rivalry
Related and
Supporting
Industries
Factor
(Input)
Conditions
Demand
Conditions
18

0
10
20
30
40
50
60
70
80
90
100
110
120
130
140
150
160
170
180
190
200
Business Environment Quality
Ease of Doing Business Rankings, India
Ranking, 2017
(vs. 190 countries)
India’s
GDP
per capita
rank: 117
Favorable
Source: World Bank Report, Doing Business (2017)
19
Unfavorable

Geographic
concentrations of
firms, suppliers, and
related institutions in
particular fields (e.g.
tourism, automotive)
that enable
productivity and
innovation
Quality of the
National
Business
Environment
State of Cluster
Development
Endowments
Human Development
and Effective
Public Institutions
Sound Monetary
and Fiscal Policies
Sophistication
of Company
Operations and
Strategy
20

Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden
Restaurants
Attractions and
Activities
e.g., theme parks,
casinos, sports
Airlines,
Cruise Ships
Travel Agents Tour Operators
Hotels
Property
Services
Maintenance
Services
Government Agencies
e.g. Australian Tourism
Commission,
Great Barrier Reef Authority
Educational Institutions
e.g. James Cook University,
Cairns College of TAFE
Industry Groups
e.g. Queensland Tourism
Industry Council
Food
Suppliers
Public Relations &
Market Research
Services
Local Retail,
Health Care, and
Other Services
Souvenirs,
Duty Free
Banks,
Foreign
Exchange
Local
Transportation
What is a Cluster?
Tourism Cluster in Cairns, Australia
21

Pharmaceutical Cluster in Andhra Pradesh
Source: MOC Student Project 2013
Pharmaceutical Companies
(MNCs, Domestic Companies, SOEs)
Chemical Suppliers
Printing & Packaging
Material Suppliers
Testing
Laboratories
Energy
Suppliers
International Institutions
(US FDA, EDQUM in Europe, ISO, ICH,
GLP, GCP, etc.)
Marketers, BDS &
Agents
CFA and Stockists
Hospitals
Pharma Resellers
Pharmacies
Distributors /
Customers
Multi-lateral Agencies
(e.g. WHO)
Pharma Machinery
Manufacturers
Law Firms
Transportation
& Logistics
Supporting
Industry
Financial Inst.
IT / ITES
Related Industries
Medical
Tourism
Medical
Devices
Agribusiness
Health
Insurance
Bulk Mfg.
Contract
R&D
Formulation
Mfg.
Institutions for Collaboration
Industry
Associations
(BDMA, OPPI,
NDMA,
PASS etc)
Education &
Research
(Pharma
Colleges;
Research Inst. -
NIPER, CCMB,
IICT etc)
Government
(Central, State, Patent Office)
Government, Regulatory, Quality

Source: “Clusters and the Great Recession” by Mercedes Delgado, Michael E. Porter, and Scott Stern (2014), “Clusters, Convergence, and Economic Performance” by Mercedes Delgado,
Michael E. Porter, and Scott Stern (2012), “Cluster and Entrepreneurship” by Mercedes Delgado, Michael E. Porter, and Scott Stern (2010); “The Economic Performance of Regions” by
Michael E. Porter (2003)
• Job growth
• Higher wages
• Higher patenting rates
• Greater new business
formation, growth and survival
• Resilience in downturns
• Build on the region’s existing and emerging clusters rather than chase hot fields
• Economic diversification occurs within clusters and across related clusters
Why Clusters Matter?
Research Findings
23

Note: Showing only clusters with greater than $5 billion in export value.
Source: International Cluster Competitiveness Profiles project; Harvard - Prof. Michael E. Porter; Richard Bryden, Director.
= $2 billion
Business Services
Oil and Gas Production and
Transportation
Hospitality and Tourism
Upstream Metal Manufacturing
Food Processing and Manufacturing
Apparel
Textile Manufacturing
Biopharmaceuticals
Transportation and Logistics
Automotive
Upstream Chemical Products
Downstream Chemical…
Plastics
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
-0.50% 0.00% 0.50% 1.00% 1.50% 2.00%
World Export
Market Share, 2015
Change in World Export Market Share, 2005-2015
Computer and
Communication
services
(-2.2%, 12.7%)
7.00%
Jewelry, Precious
Metals and Collectibles
(+1.7%, 14.9%)
Overall Export Share
2015: 2.225%
24
Change in Overall
Export Growth
2005-2015: +0.874%
India’s Exports by Traded Cluster
Production Technology
and Heavy Machinery Financial Services
Downstream Metal Products

Metal-
working
Food
Processing
Lighting
Medical
Devices
IT &
Analytical
Instruments
Comm-
unications
Equip. &
Services
Down-
stream
ChemicalsBiopharma
Leather
Apparel
Printing
Services
Financial
Services
Insurance
Environ-
mental
Services
Business
Services
Education &
Knowledge
Creation
Marketing
Services
Music &
Sound
Recording
Performing
Arts
Video
Production
Hospitality
& Tourism
Metal
Mining
Coal
Mining
Upstream
Metals
Wood
Products
Furniture
Tobacco
Aerospace
Upstream
Chemicals
Trailers &
Appliances
Textiles
Footwear
Forestry
Agriculture
Plastics
Plastics
Distribution
& eComm.
Livestock
Processing
Fishing &
Fishing
Products
Water
Transport
Transport
&Logistics
Vulcanized
Materials
Construction
Nonmetal
Mining
Oil & Gas
Electricity
Down-
stream
Metals
Production
Metal-
working
Automotive
Paper &
Packaging
Recreation
& Electric
Goods
Jewelry &
Precious
Metals
Related Clusters and Economic Diversification
India 2015
4.5% - 9.0%
> 9%
World Export Share
2.25% - 4.5%
25

Labor/
HR-intensive
Capital/
HR-intensive
Services
Logistics
Med.
Devices
Logistics:
Docks,
Bunkering
Electronics
Petro-
chemicals
Financial
Services
Pharma
Business
Services
Aerospace
& Defense
Tourism
Media &
Design
IT
Logistics:
Air Travel
Logistics:
Trans-
shipment
Water
Technology
Higher
Education
1900-1960 1970s 1980s 1990s 2000s
Regional
HQs
Biotech
Clusters and Economic Diversification
Singapore
26

• Strengthens multiple related firms/institutions simultaneously
• Brings together firms of all sizes, including SME’s
• Enhances the effectiveness of traditional economic policy areas,
such as training, R&D, export promotion, FDI attraction, etc.
• A forum for collaboration between the private sector, trade
associations, government, educational, and research institutions
• A powerful tool for public/private collaboration
Clusters as a Tool for Economic Policy
• Sound cluster policy should address all existing
and emerging clusters, and not pick winners
27

Geographic Influences on Competitiveness
States, Regions
and Cities
Nation
• Regions are the most important economic unit for
competitiveness in larger countries, especially countries
beyond subsistence development
28

• Economic performance varies significantly across sub-national
regions (e.g., provinces, states, metropolitan areas)
The Role of Sub-National Regions in
Economic Development
29

Alabama
Alaska
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
New Hampshire
New Jersey
New Mexico
New York
North Carolina Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
$30,000
$35,000
$40,000
$45,000
$50,000
$55,000
$60,000
$65,000
$70,000
-1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0%
High but declining
prosperity versus U.S.
High and rising prosperity
versus U.S.
Low and declining
prosperity versus U.S.
Low but rising prosperity
versus U.S.
Source: BEA. Notes: GDP in real 2009 dollars. Growth rate is calculated as compound annual growth rate.
Real Growth in Gross Domestic Product per Capita, 2005 to 2015
Prosperity Performance of U.S. StatesReal GDP per
Capita, 2015
U.S. Average GDP Per
Capita, 2014: $50,054
North Dakota
Nevada
U.S. Average growth in GDP
Per Capita, 2014: 0.4%
2005-2015
30

Prosperity Performance of Indian States
2005-2014
Gross Domestic Product per Capita Real Growth Rate, 1999 to 2009
Note: Growth rate is calculated as compound annual growth rate. Source: CEIC.
Real growth in GDP per Capita, 2005-2014
GDP per Capita, 2014
(2005 Indian Rupees)
India Overall: ₹45,750
India Overall: 6.6%
Chandigarh
Sikkim
Uttarakhand
Andaman & Nicobar Islands
Andhra Pradesh
Arunachal Pradesh
Assam
Bihar
Chattisgarh
Delhi
Goa
Gujarat
Haryana
Himachal Pradesh
Jammu & Kashmir
Jharkhand
Karnataka
Kerala
Madhya Pradesh
Maharashtra
Manipur
Meghalaya
Mizoram
Nagaland
Odisha
Puducherry
Punjab
Rajasthan
Tamil Nadu
Telangana
Tripura
Uttar Pradesh
West Bengal
₹ 0
₹ 20,000
₹ 40,000
₹ 60,000
₹ 80,000
₹ 1,00,000
₹ 1,20,000
₹ 1,40,000
₹ 1,60,000
3% 4% 5% 6% 7% 8% 9%
31

• Economic performance varies significantly across sub-
national regions (e.g., provinces, states, metropolitan areas)
• Many essential levers of competitiveness reside at the
regional and sub-regional level
• Regions specialize in different clusters
32

33
Cluster Specialization
Selected Indian States
Tamil Nadu
• Textile Manufacturing
• Automotive
• Footwear
• Leather and Related Products
Gujarat
• Jewelry and Precious Metals
• Upstream Chemical Products
• Water Transportation
• Nonmetal Mining
Maharashtra
• Biopharmaceuticals
• IT and Analytical Instruments
• Jewelry and Precious Metals
• Furniture
Source: India ASI 2014; India Cluster Mapping Project, Harvard ISC – Prof. Michael E. Porter, India IFC – Amit Kapoor
Uttar Pradesh
• Livestock Processing
• Footwear
• Downstream Chemical Products
• Food Processing and Manufacturing
Haryana
• Automotive
• Apparel
• Recreational and Small Electronic Goods
• Medical Devices
Clusters with strongest employment
specialization based on annual survey
of manufacturing industries 2014;

• Regions are a critical unit of competitiveness
• Each region needs its own distinctive strategy and action agenda
– Business environment improvement
– Cluster upgrading
– Improving institutional effectiveness
• Much economic policy responsibility and accountability should be
decentralized to regions
34
• The role of the national government should be to set the overall policy
framework while enabling open competition and economic integration
across regions
- Digitization
- Infrastructure for connecting states and regions
- Harmonizing rules and incentives across regions

• An overall agenda for
creating a more distinctive
and competitive position for
a country or region, based
on its particular
circumstances
• Implementing best practices
in each policy area
• There are a huge number of
policy areas that matter
• No region or country can (or
should try to) make progress
in all areas simultaneously
Policy
Improvement
Economic
Strategy
The Need for an Economic Strategy
35

National or Regional
Value Proposition
Developing an Economic Strategy
• What is a distinctive competitive position for the nation given its
location, legacy, existing strengths, and potential strengths?
– What unique advantages as a location?
– For what types of activities and clusters?
– What roles in the broader global economy?
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 can be built upon?
• What weaknesses must be
addressed to remove key constraints
to growth and achieve parity with
peer locations?
• Priorities and sequencing are fundamental
to successful economic development36

What is Unique About India?
• Vibrant and largest democracy in the world
• Large domestic market
• Growing labor force, including strong reservoir of skilled graduates
• Well-established position in IT services
• Growing number of internationally active firms
• Large, heterogeneous country
• Deep international linkages through history, diaspora, and growing
trade and investment
• A rich history, culture, and diversity
• What will be India’s distinctive role in the global economy?
• What will be India’s unique competitive advantages?

• Competitiveness improvement will require sustained efforts across
decades and government administrations
– Mechanisms needed to improve the continuity of policy over time
• Competitiveness is affected by numerous government entities and
levels of government
– Multiple agencies and departments (e.g. finance, trade, science and
technology, commerce, regional policy, energy, agriculture) have an influence
on competitiveness
– “Economic” agencies and “social” agencies are both involved
– Multiple levels of government (nations, states, cities, etc.) affect the business
environment
– Intergovernmental relations with neighboring countries affect productivity
• Coordinating structures are needed to bring together ministries,
agencies and levels of government around an integrated economic
strategy
Government Structure and
38

The Private Sector’s Role in Economic
Development
• Inform government on the needs of business and the constraints on company
and cluster development
• Work closely with local educational and research institutions to improve their
quality and create specialized programs addressing the cluster’s needs
• Nurture local suppliers and attract foreign suppliers
• Collaborate with other companies to enhance competitiveness through trade
associations and other mechanisms
• Participate actively in national and regional competitiveness initiatives
• Compete with shared value strategies that address social needs and
challenges with a business model
– Beyond corporate philanthropy
39

Themes for India
1. Broad-based inclusive development, which integrates economic
and social progress
2. A cluster-based economic development model
3. Clear roles for the national and state governments in upgrading
competitiveness
4. Make the private sector a true partner in competitiveness upgrading
5. Better data and benchmarking to inform evidence-based policy
6. Articulate a shared vision for India’s economic and social future that
motivates and inspires citizens
7. Create a culture of participation and responsibility amongst
citizens

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