Portuguese Competitiveness
Professor Michael E. Porter
Institute for Strategy and Competitiveness
Harvard Business School
Novos Desafiois da Competitividade
Lisbon, Portugal
April 17th, 2002
This presentation draws on ideas from Professor Porter’s articles and books, in particular, The Competitive Advantage of Nations (The Free Press,
1990), “The Microeconomic Foundations of Economic Development,” in The Global Competitiveness Report 2001/02, (World Economic Forum,
1998), “Clusters and the New Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 1998),
ongoing statistical study of clusters, and “What is Strategy?” (Harvard Business Review, Nov/Dec 1996). For further information please check the
Institute’s web site at www.isc.hbs.edu. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form1or by
any means - electronic, mechanical, photocopying, recording, or otherwise - without the permission of Michael E. Porter.
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Copyright © 2002 Professor Michael E. Porter
Portuguese Economic Strategy 1995 to 2001
•
Secure entry to the European Monetary Union
•
Reduce public sector deficits
•
Bring down inflation
•
Adopt the required European Union regulations
•
As of 2001, all these goals were achieved
•
The sustainability of Portugal’s economic growth is uncertain
•
A new national economic strategy will be necessary
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Copyright © 2002 Professor Michael E. Porter
Sources of 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”
•
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
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Copyright © 2002 Professor Michael E. Porter
Determinants of Productivity and Productivity Growth
Macroeconomic,
Macroeconomic,Political,
Political,Social,
Social,and
andLegal
Legal
Context
Contextfor
forDevelopment
Development
Microeconomic
MicroeconomicFoundations
Foundationsof
ofDevelopment
Development
Sophistication
Sophistication
of
ofCompany
Company
Operations
Operationsand
and
Strategy
Strategy
Quality
Qualityof
ofthe
the
Microeconomic
Microeconomic
Business
Business
Environment
Environment
• A sound macroeconomic, political, social, and legal context creates the
potential for competitiveness, but is not sufficient
• Competitiveness ultimately depends on improving the microeconomic
capability of the economy and the sophistication of local competition
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Copyright © 2002 Professor Michael E. Porter
Innovation and Prosperity
Prosperity
Prosperity
Productivity
Productivity
“Competitiveness”
Innovative
Innovative Capacity
Capacity
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Innovation is more than just scientific discovery
!
There are no low-tech industries, only low-tech firms
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Copyright © 2002 Professor Michael E. Porter
Productivity and the Microeconomic Business Environment
Context
Context for
for
Firm
Firm
Strategy
Strategy
and
andRivalry
Rivalry
Factor
Factor
(Input)
(Input)
Conditions
Conditions
• A local context that
encourages efficiency,
investment, and sustained
upgrading
• Open and vigorous
competition among locally
based rivals
Demand
Demand
Conditions
Conditions
• High quality, specialized
• Sophisticated and demanding
inputs available to firms:
local customer(s)
- human resources
• Unusual local demand in
Related
specialized segments that can
Related and
and
- capital resources
Supporting
be served globally
Supporting
- physical infrastructure
Industries
Industries
• Customer needs that anticipate
- administrative infrastructure
those elsewhere
- information infrastructure
• Presence of capable, locally-based
- scientific and technological
suppliers and firms in related fields
infrastructure
• Presence of clusters instead of isolated
- natural resources
industries
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• The microeconomic business environment consist of the array of assets,
information, rules, policies, and institutions
surrounding competition
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Copyright © 2002 Professor Michael E. Porter
The California Wine Cluster
Grapestock
Grapestock
Fertilizer,
Fertilizer, Pesticides,
Pesticides,
Herbicides
Herbicides
State Government Agencies
(e.g., Select Committee on Wine
Production and Economy)
Winemaking
WinemakingEquipment
Equipment
Barrels
Barrels
Bottles
Bottles
Caps
Caps and
and Corks
Corks
Grape
Grape Harvesting
Harvesting
Equipment
Equipment
Labels
Labels
Irrigation
Irrigation Technology
Technology
Growers/Vineyards
Growers/Vineyards
Wineries/Processing
Wineries/Processing
Facilities
Facilities
Public
Public Relations
Relationsand
and
Advertising
Advertising
Specialized
SpecializedPublications
Publications
(e.g.,
(e.g.,Wine
WineSpectator,
Spectator,Trade
Trade
Journal)
Journal)
California
California
Agricultural
Agricultural Cluster
Cluster
Educational,
Educational, Research,
Research, && Trade
Trade
Organizations
(e.g.
Organizations (e.g.Wine
Wine Institute,
Institute,
UC
UCDavis,
Davis,Culinary
CulinaryInstitutes)
Institutes)
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.
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Tourism
Tourism Cluster
Cluster
Food
Food Cluster
Cluster
7
Copyright © 2002 Professor Michael E. Porter
Agenda
• Portugal’s economic performance
• Portugal’s competitiveness
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Copyright © 2002 Professor Michael E. Porter
Relative Economic Performance
Level and Growth Rate of GDP per Capita, 1990-2000
14%
25,000
GDP per Capita, 2000
1990-1995
1995-2000
12%
$25,000
10%
20,000
$20,000
8%
15,000
6%
$15,000
4%
10,000
$10,000
2%
5,000
0%
$5,000
Hungary Slovenia
Greece
S Korea
Portugal
Spain
New
Zealand
Israel
Taiwan
0
Source: EIU
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Copyright © 2002 Professor Michael E. Porter
Portugal Economic Performance
Annual Catch-Up Rates to US GDP per Capita Levels, 1970-1999
Level of GDP per Capita
relative to the US,
Beginning of Period
60%
1995-1999
50%
1990-1995
1980-1990
1970-1980
40%
30%
1950-1970
20%
10%
0%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
Portuguese GDP per capita Growth above US Growth
Source: OECD
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Copyright © 2002 Professor Michael E. Porter
Macroeconomic Imbalances
Portugal
% of GDP
8
6
Private Sector Saving
Public Sector Saving
4
2
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
-2
-4
-6
-8
-10
Note: The drop in private sector saving since 1995 is in roughly equal parts driven by households decreasing savings and companies increasing debts
Source: OECD
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Copyright © 2002 Professor Michael E. Porter
Comparative Economic Performance
EU Structural and Cohesion Funds for Portugal
% of GDP
% of Gross Fixed Capital
Formation
16%
3.4%
14%
3.3%
12%
3.2%
10%
3.1%
1989-93
8%
1994-99
3.0%
1989-93
1994-99
2000-06e
2000-06e
6%
2.9%
4%
2.8%
2%
2.7%
0%
Source: European Commission
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Copyright © 2002 Professor Michael E. Porter
Comparative Economic Performance
Productivity Growth in Manufacturing, Selected Countries
12%
1991-1995
10%
1996-2000
8%
6%
4%
2%
0%
Fr
an
ce
Sp
ai
n
Po
rtu
ga
l
Ita
ly
Ire
la
nd
Fi
nla
nd
Au
st
ria
Sw
ed
Un
en
itd
St
at
es
Be
lg
iu
m
G
re
ec
e
G
er
Un
m
ite
an
d
y
Ki
ng
Ne dom
th
er
la
nd
s
D
en
m
ar
k
-2%
Note:
Sorted by overall productivity growth 1991-2000
Source: European Commission
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Copyright © 2002 Professor Michael E. Porter
Comparative Innovation Performance
Selected Countries and European Union
EU Patents per million
people, 1997-99 average
120
116.5
119.4
France
EU-15
100
80
59.7
60
40
18.5
20
2.7
6.2
0
Portugal
Greece
Spain
Italy
Source: European Commission
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Copyright © 2002 Professor Michael E. Porter
Portuguese Economic Performance 1995 to 2001
Performance
• Solid economic growth
• Very slow productivity growth
• Extremely low innovation rates
• No microeconomic competitiveness strategy
• Sustainability of macroeconomic policies in question
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Copyright © 2002 Professor Michael E. Porter
Portugal’s Competitive Position in 2002
•
Easy catch-up period is over
•
Reduction of EU structural funds is likely
•
Ability to use devaluation to prop up “competitiveness” is
gone
•
Eastern European countries with lower wages are about to
enter EU market
•
What is the new economic strategy to deal with this
environment?
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Copyright © 2002 Professor Michael E. Porter
Agenda
• Portugal’s economic performance
• Portugal’s competitiveness
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Copyright © 2002 Professor Michael E. Porter
Portuguese Diamond in 1994
Findings from “The Competitiveness of Portugal”-study
Context
Context for
for
Firm
Firm
Strategy
Strategy
and
andRivalry
Rivalry
Factor
Factor
(Input)
(Input)
Conditions
Conditions
• Goals discourage
upgrading
• Strategies do not
emphasize upgrading
and exporting
Demand
Demand
Conditions
Conditions
• Lack of skilled workforce and
• Relatively
management
unsophisticated local
consumer and industrial
• Low level of R&D
demand
• High energy costs
Related
Related and
and
• Inefficient capital markets
Supporting
Supporting
• Infrastructure still lagging
Industries
Industries
despite some recent
improvements
• Significant regional clusters
• Insufficient linkages
• Lack of strong related and supported industries
Source: Monitor Company
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Copyright © 2002 Professor Michael E. Porter
even in most 18significant clusters
Factor
Factor
(Input)
(Input)
Conditions
Conditions
Factor (Input) Conditions
Portugal’s Relative Position
Competitive Advantages
Relative to GDP per Capita
Competitive Disadvantages
Relative to GDP per Capita
Country Ranking
Country Ranking
Road Infrastructure Quality
18
Quality of Math and Science Education
56
Ease of Access to Loans
19
Availability of Scientists and Engineers
50
Local Equity Market Access
23
Port Infrastructure Quality
45
Availability and Cost of Cellular Phones
23
Quality of Scientific Research Inst.
41
Financial Market Sophistication
24
Administrative Burden for Start-Ups
41
Venture Capital Availability
24
Quality of Public Schools
40
Police Protection of Businesses
25
Railroad Infrastructure Quality
40
Speed and Cost of Internet Access
25
Air Transport Infrastructure Quality
39
Extent of Bureaucratic Red Tape
39
University/Industry R&D Collaboration
38
Patents per Capita (2000)
37
Quality of Management Schools
36
Adequacy of Private Sector Legal Recourse 34
Note:
Rank by countries; overall Portugal ranks 31 (29 on Quality of the National Business Environment)
Source: Global Competitiveness Report 2001
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Copyright © 2002 Professor Michael E. Porter
Educational Attainment
Southern European Countries and Regions
Share of 25-59 year old by level
of educational attainment
100%
10%
90%
21%
22%
18%
10%
22%
12%
80%
36%
70%
16%
33%
60%
43%
42%
50%
40%
78%
High
Medium
Low
62%
30%
54%
49%
20%
36%
37%
EU-15
France
10%
0%
Greece
Italy
Spain
Portugal
Source: European Commission
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Copyright © 2002 Professor Michael E. Porter
Context
Contextfor
forFirm
Firm
Strategy
Strategy
and
andRivalry
Rivalry
Context for Firm Strategy and Rivalry
Portugal’s Relative Position
Competitive Advantages
Relative to GDP per Capita
Competitive Disadvantages
Relative to GDP per Capita
Country Ranking
Country Ranking
Intellectual Property Protection
23
Efficacy of Corporate Boards
53
Hidden Trade Barrier Liberalization
24
51
Tariff Liberalization
24
Extent of Distortive Government
Subsidies
Decentralization of Corporate Activity
47
Cooperation in Labor-Employer
Relations
40
Extent of Locally Based Competitors
36
Intensity of Local Competition
33
Effectiveness of Anti-Trust Policy
30
Note:
Rank by countries; overall Portugal ranks 31 (29 on Quality of the National Business Environment)
Source: Global Competitiveness Report 2001
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Copyright © 2002 Professor Michael E. Porter
Investments in Research & Development
Private Sector R&D Expenditure
Share of GDP, 1999
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
al
Po
rtu
g
ai
n
Sp
ly
Ita
st
ria
Au
la
nd
Ire
lg
i
um
s
Be
er
la
nd
om
N
d
U
ni
te
et
h
Ki
n
gd
ar
k
en
m
ce
D
Fr
an
y
m
an
d
G
er
an
St
a
d
ni
te
U
Fi
nl
te
s
n
pa
Ja
Sw
ed
en
0.0%
Source: OECD
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Copyright © 2002 Professor Michael E. Porter
Difficulty of Business Formation
Selected OECD Countries
Cost of Business Formation
relative to GDP per capita
60%
50%
40%
30%
20%
10%
K
U
S
U
d
an
Fi
nl
Sw
ed
en
n
m
an
y
G
er
Ja
pa
ai
n
Sp
ce
Fr
an
ly
Ita
er
la
nd
s
al
N
et
h
rtu
g
Po
Au
st
ria
G
re
ec
e
0%
Source: Freeman (2001)
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Copyright © 2002 Professor Michael E. Porter
Demand
Demand
Conditions
Conditions
Demand Conditions
Portugal’s Relative Position
Competitive Advantages
Relative to GDP per Capita
Competitive Disadvantages
Relative to GDP per Capita
Country Ranking
Government Procurement of Advanced
Technology Products
31
Stringency of Environmental Regulations
28
Presence of Demanding Regulatory
Standards
28
Laws Relating to Information Technology
28
Buyer Sophistication
27
Consumer Adoption of Latest Products
26
Note:
Rank by countries; overall Portugal ranks 31 (29 on Quality of the National Business Environment)
Source: Global Competitiveness Report 2001
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Copyright © 2002 Professor Michael E. Porter
Related
Relatedand
and
Supporting
Supporting
Industries
Industries
Related and Supporting Industries
Portugal’s Relative Position
Competitive Advantages
Relative to GDP per Capita
Competitive Disadvantages
Relative to GDP per Capita
Country Ranking
Local Availability of Process Machinery
42
Local Supplier Quality
41
Local Availability of Specialized Research 41
and Training Services
Local Availability of Information
Technology Services
41
Extent of Product and Process
Collaboration
38
Local Availability of Components and
Parts
34
Local Supplier Quantity
31
State of Cluster Development
29
Note:
Rank by countries; overall Portugal ranks 31 (29 on Quality of the National Business Environment)
Source: Global Competitiveness Report 2001
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Copyright © 2002 Professor Michael E. Porter
Portuguese Diamond in 2002
Context
Context for
for
Firm
Firm
Strategy
Strategy
and
andRivalry
Rivalry
Factor
Factor
(Input)
(Input)
Conditions
Conditions
• Lack of skilled workforce and
management
• Low level of scientific and
technological infrastructure
• Infrastructure still lagging
despite some recent
improvements
• Administrative barriers to
business formation
• Lack of local rivalry
• Low level of private R&D
expenditure
Related
Related and
and
Supporting
Supporting
Industries
Industries
Demand
Demand
Conditions
Conditions
• Relatively
unsophisticated local
consumer and industrial
demand
• Significant regional clusters
• Insufficient linkages within clusters
• Lack of strong related and supported industries
even in most significant clusters
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Copyright © 2002 Professor Michael E. Porter
Portuguese Clusters
Footwear
Cluster institutions
(APPICAPS, APIC, CTC)
Casual
shoes
Dress
shoes
Leather
Leather
belts
Leather
clothing
Leather
Footwear
Manufacturers
Leather
handbags
Leather
Leather
gloves
Textiles and
fashion
Clusters
Government
Footwear
machinery
Machinery
suppliers
Processed
leather
Leather
Cluster
Shoe design
Local software
developers
Marketing and
distribution
International
distributors
Branding
International
brands
Universities and
R&D institutions
Source: Research by HBS MBA students M Abecasis, E Cernoia, M Pita, and S Morais
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Copyright © 2002 Professor Michael E. Porter
Portuguese Clusters
Footwear
•
Cluster analyzed in the 1994 study
– Concentrated around Porto
– Competing on price and low wage
– Low productivity, poor relations to suppliers, low level of product
differentiation, and limited understanding of consumer needs
•
Situation in 2002
– Increasing competition from low cost locations in Asia
– Moderate improvements in productivity, response times, and technical
efficiency
– Still poor relations to related and supporting industries
– Active cluster organization APICCAPS; recently launched “Portugal Quality
Shoes” re-branding initiative
– In a contracting world shoe market, Portuguese export market share has
slightly increased to 6.1% between 1995 and 1999
•
Progress suggests potential of cluster development in Portugal
• No concerted commitment across the country
Note: Draws on research by HBS MBA students M Abecasis, E Cernoia, M Pita, and S Morais
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Copyright © 2002 Professor Michael E. Porter
Portuguese Competitiveness
1994 versus 2002
• Portugal has made important progress on macroeconomic terms
• Progress on the microeconomic foundations of competitiveness
has been largely absent
– There are exceptions (E.g., reduction of government subsidies,
privatizations, creation of a more independent anti-trust authority)
– The exceptions were more a by-product of adopting EU rules than
part of a competitiveness strategy
• Portugal must address its microeconomic weaknesses if it is to
improve or even sustain its prosperity
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Copyright © 2002 Professor Michael E. Porter
Portugal in 2002
The Need for a New Strategy
•
The central challenge is microeconomic
•
Portugal’s new strategy must focus on competitiveness and
productivity
– A long-term program to upgrade the business environment
– A long-term program to build innovative capacity
•
Aggressive cluster development throughout the economy must
become a national priority
•
Leaders must create a national economic vision to inspire and
motivate the Portuguese people
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Copyright © 2002 Professor Michael E. Porter