Competitiveness for the Third Millennium:
Implications for Croatia
Professor Michael E. Porter
Harvard Business School
CEO Agenda Forum
Zagreb, Croatia
May 15, 2009
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: May 13, 2pm
20090515 – CAON Crotia.ppt
1
Copyright 2009 © Professor Michael E. Porter
The Croatian Economy in 2009
• Croatia has experienced solid growth rates over the last few years,
taking advantage of the transition to a market economy
• The global economic crisis is now starting to take its toll
• Despite the recent period of growth, however, Croatia is facing serious
competitiveness challenges
• Croatia needs to address these issues aggressively instead of
hoping for an automatic return to growth after the crisis or that EU
ascension is sufficient
• Croatia lacks a clear strategy and an effective implementation
mechanism for improving competitiveness
20090515 – CAON Crotia.ppt
2
Copyright 2009 © Professor Michael E. Porter
Prosperity Performance
Selected Countries
PPP-adjusted GDP per
Capita, 2007 ($USD)
$50,000
Norway ($54,604)
Qatar ($57,175, 0.92%)
United States
$45,000
Ireland
Hong Kong
Singapore
$40,000
$35,000
Eastern and Southern Europe
Other countries
Switzerland
Kuwait
Austria
Sweden
Italy
$30,000
Canada
Australia
UK Finland
Japan
Germany
France
Spain
UAE
$25,000
Taiwan
Greece
Slovenia
New Zealand
Israel
Bahrain
Cyprus
Saudi Arabia
Malta
South Korea
Czech Republic
Oman
$20,000
Hungary
Libya
Mexico
$15,000
$10,000
Argentina
Lebanon
Brazil
Belize
Guatemala
El Salvador
Yemen
$5,000
Poland
Malaysia
Chile
Turkey
Estonia
Slovakia
Croatia
Russia
Bulgaria
Iran
Romania
South Africa
Macedonia Thailand
Bosnia & Herzegovina
Albania
Egypt
Jordan
Moldova
Syria
Philippines
Vietnam
India
Laos
Pakistan
Lithuania
Latvia (12.6%)
Kazakhstan (12.3%)
Belarus
Ukraine
China (13.0%)
Cambodia
$0
2%
4%
6%
8%
10%
Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2000 to 2007
•
12%
Croatia has benefited from the end of conflict and market reforms
Note: highlighted countries are part of the East African Community (EAC). Source: EIU (2009), authors calculations
20090515 – CAON Crotia.ppt
3
Copyright 2009 © Professor Michael E. Porter
What is Competitiveness?
• Competitiveness depends on the productivity with which a nation uses
its human, capital, and natural resources.
– Productivity sets the sustainable standard of living (wages, returns on
capital, returns on natural resources)
– It is not what industries a nation competes in that matters for prosperity, but
how productively it competes in those industries
– Productivity in a national economy arises from a combination of domestic
and foreign firms
– The productivity of “local” or domestic industries is fundamental to
competitiveness, not just that of export industries
• Only competitive businesses can create wealth and jobs
• Nations compete to offer the most productive environment for business
• The public and private sectors play different but interrelated roles in
creating a productive economy
20090515 – CAON Crotia.ppt
4
Copyright 2009 © Professor Michael E. Porter
Comparative Labor Productivity
Real GDP per employee
(PPP adjusted US$), 2008
Selected Countries
$90,000
USA
Ireland
$80,000
Hong Kong
Eastern and Southern Europe
Other countries
France
Austria
Canada
Australia
$70,000
UK
Finland
Germany
Italy
Spain
Switzerland
Greece
Saudi Arabia
Japan
Oman
$60,000
Malta
$50,000
Korea
New Zealand
Cyprus
Slovakia
Hungary
Czech Republic
Croatia
Portugal
$40,000
Slovenia
Poland
Lithuania
Estonia
Turkey
$30,000
Iran
Peru
$20,000
Syria
Cote d’Ivoire
Cameroon
Senegal
Zimbabwe (-8.9%)
$0
-2%
-1%
0%
1%
Latvia
Russia
Romania
Bulgaria
Brazil
Algeria
$10,000
Malaysia
Mexico
Argentina
Chile
Macedonia
Tunisia
Thailand
Morocco
Pakistan
Kenya
2%
South Africa
Albania
Egypt
Ukraine
Belarus (8.6%)
Kazakhstan
China (10.1%)
Indonesia
Angola (14.0%)
India
Bangladesh
Nigeria
Vietnam
Cambodia
Uganda
Mozambique
Ghana
Philippines
3%
4%
5%
6%
7%
8%
Growth of real GDP per employee (PPP-adjusted), 2004 to 2008
•
Croatia’s labor productivity is lagging, and overstated by low workforce participation
5
20090515 authors
– CAON Crotia.ppt
Source:
calculation, Groningen Growth and Development Centre (2009), EIU (2009)
Copyright 2009 © Professor Michael E. Porter
Labor Force Utilization
Labor Force
Participation Rate, 2008
65%
60%
Participation Rates, Selected Countries
Kuwait
Eastern and Southern Europe
Other countries
China
Singapore
Iceland
Thailand
55%
50%
Brazil
45%
40%
Colombia
Philippines
Norway
Canada
Australia Vietnam
Sweden
Russia
Denmark
New Zealand
Latvia
Czech Rep.
Ireland
Estonia
UK
Finland
Spain
Cyprus
South Korea
Indonesia
Ukraine
Netherlands
France
Slovenia
India
Greece
Poland Romania
Macedonia
Chile Austria
Ghana
Italy
Hungary
Mexico
Argentina
Israel
Malaysia
Germany
Japan
USA
Slovakia
Lithuania
Moldova
Cote d’Ivoire
35%
Turkey
Croatia
Bulgaria
Nigeria
South Africa
Tunisia
Albania
Pakistan
30%
Egypt
Libya
Saudi Arabia
25%
-3%
•
-2%
-1%
0%
1%
2%
3%
Change in Labor Force Participation Rate, 2004 to 2008
4%
5%
Croatia is caught in a trap where low productivity retards job growth, but unemployment retards needed
reforms
Source: Economist Intelligence Unit (2009)
20090515 – CAON Crotia.ppt
6
Copyright 2009 © Professor Michael E. Porter
Export Performance
Exports of Goods and
Services (% of GDP), 2008
100%
Selected Countries
Malaysia (103.5%)
90%
Slovakia
Belgium
Ireland
80%
Czech Republic
Netherlands
Thailand
Estonia
70%
Belarus
60%
Cyprus
Ukraine (-17.5%)
40%
Moldova
Philippines
30%
20%
10%
Saudi Arabia
Latvia
Poland
Bolivia
Israel
China
South Africa
Canada
Portugal
Russia New Zealand
Romania
Mexico
Italy
Indonesia
Peru
Spain France UK
India
Argentina
Bangladesh
Greece Australia
Albania Turkey
Japan
Benin
Brazil
USA
Pakistan
-10%
-5%
Egypt
Eastern and Southern Europe
Other countries
Ethiopia
Burundi
0%
-15%
Taiwan
Slovenia
Bulgaria
Lithuania
Austria
Korea
Denmark
Jordan Sweden
Macedonia
Croatia Norway
Germany
Chile
Iceland
Finland
Cambodia
50%
Hungary
Vietnam
0%
5%
10%
15%
20%
Change in Exports of Goods and Services (% of GDP), 2004 to 2008
Source: EIU (2008), authors’ analysis
20090515 – CAON Crotia.ppt
•
Croatia's export growth is lagging
7
Copyright 2009 © Professor Michael E. Porter
Export Performance
Selected Countries
Exports of Goods and
Services (% of GDP)
Rank, 2008
95%
Slovakia
Hungary
Czech Republic
85%
Slovenia
Croatia
75%
65%
55%
45%
35%
25%
1994
20090515 – CAON Crotia.ppt
1996
1998
2000
2002
8
2004
2006
2008
Copyright 2009 © Professor Michael E. Porter
Croatia’s Exports By Type of Industry
World Export Market
Share (current USD)
0.50%
Processed Goods
Semi- and Unprocessed Goods
Services
TOTAL
0.45%
0.40%
0.35%
0.30%
0.25%
0.20%
0.15%
0.10%
0.05%
0.00%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Source: UNComTrade, WTO (2008)
20090515 – CAON Crotia.ppt
9
Copyright 2009 © Professor Michael E. Porter
Domestic Fixed Investment Rates
Selected Countries
Gross Fixed Investment
as % of GDP, 2008
36%
India
Nicaragua
China (40.8%)
Eastern and Southern Europe
Other countries
Romania (11.1%)
Bulgaria (12.6%)
Croatia
32%
Vietnam (44.6%)
Belarus
Latvia
Estonia
28%
Spain
Korea
Australia
Slovenia
Thailand
Kazakhstan
Slovakia
Ukraine
Singapore
Indonesia
Lithuania
Chile
Colombia
Czech Rep.
24%
Albania
Ireland
20%
Argentina
Mexico
Canada
Cambodia
Denmark France Russia
Poland
Portugal
Switzerland
Cyprus
Belgium
Macedonia
Norway
South Africa
Italy Netherlands
Finland
Sweden
Turkey
Pakistan
Malaysia
Egypt
Saudi Arabia
Germany
Malta
Brazil
New Zealand
Greece
Hungary
Hong Kong
Tunisia
Iceland
Japan
Austria
Israel
UK
16%
USA
12%
-4%
Philippines
-2%
0%
2%
4%
6%
8%
Change in Gross Fixed Investment (as % of GDP), 2004 to 2008
•
Note: Includes inbound FDI
20090515 EIU,
– CAON
Crotia.ppt
Source:
2009
High investment is due to catch-up investments and FDI driven by privatization
10
Copyright 2009 © Professor Michael E. Porter
Inbound Foreign Investment Performance
Inward FDI Stocks as % of
GDP, Average 2003 - 2007
Stocks and Flows, Selected Countries
80%
Estonia
Netherlands
Eastern and Southern Europe
Other countries
70%
Singapore
(160.1%, 64.7%)
Hungary
Switzerland
New Zealand
Bulgaria (69%)
Sweden
Czech Republic
50%
20%
10%
Slovakia
Croatia
Denmark
30%
Cyprus
Vietnam
60%
40%
Chile
Kazakhstan
Cambodia
UK
Macedonia
Spain
Thailand Philippines
Moldova
Australia
Canada
Latvia
Iceland (46.7%)
Egypt
Poland
South Africa
Finland Lithuania
France
Israel
Romania
Armenia
Bosnia &
Colombia
Mexico
Laos
Norway
Herzegovina
Austria
Brazil
Russia
Slovenia
Ukraine
Germany
Turkey
Greece China
USA
Malaysia
South Korea
Saudi Arabia
Italy
Pakistan
Indonesia
Belarus
India
Japan
Portugal
0%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
FDI Inflows as % of Gross Fixed Capital Formation, Average 2003 - 2007
•
Source: UNCTAD, World
20090515 – CAON
Crotia.ppt
Investment
Report
(2009)
Foreign direct investment inflows have been a key driver of economic growth, but
most are due to privatization rather than
greenfield investments
11
Copyright 2009 © Professor Michael E. Porter
Foreign Investment in Croatia
Selected Activities
Average FDI by
activity, millions of €
2,750
2000
2,250
2006
2007
1,750
2008*
1,250
750
Recreation and
Sports
Construction
Water purification
and distrubtion
Automotive
Mft. machinery and
equipment
Food Products
Hospitality
Retail Trade
Wholesale Trade
Other Activities
Real Estate
Telecommunications
Chemicals
Oil, Gas and Coal
-250
Financial Services
250
*2008 is estimated figure.
Source: Foreign Direct Investment in Croatia (by activity), Croatian National Bank, 2009
20090515 – CAON Crotia.ppt
12
Copyright 2009 © Professor Michael E. Porter
Innovative Capacity
Innovation Output of Selected Countries
Average U.S. patents per 1
million population, 2003-2007
9
Slovenia
8
7
6
Hungary
5
4
Malaysia
Czech Republic
Croatia
3
2
1
South Africa
Brazil
Mexico
Argentina
Indonesia
Thailand
Colombia
0
-30%
-20%
•
20090515 USPTO
– CAON Crotia.ppt
Source:
(2008), EIU (2008)
-10%
Greece
Estonia
Romania
Belarus
Chile
Poland
Russia
Egypt
Portugal
Saudi
Arabia
Philippines
0%
China
India
10%
20%
CAGR of US-registered patents, 2003 – 2007
Croatia has technological strengths, but these have not
13
been mobilized in business development
30%
40%
50 patents =
Copyright 2009 © Professor Michael E. Porter
Causes of Competitiveness
Microeconomic Competitiveness
Quality of the
National
Business
Environment
State of Cluster
Development
Sophistication
of Company
Operations and
Strategy
Macroeconomic Competitiveness
Social
Infrastructure
and Political
Institutions
Macroeconomic
Policies
Natural Endowments
• Productivity ultimately depends on improving the microeconomic capability of
the economy and the sophistication of local competition
20090515 – CAON Crotia.ppt
14
Copyright 2009 © Professor Michael E. Porter
Macroeconomic Competitiveness
Social Infrastructure and
Political Institutions
•
Macroeconomic
Policies
Basic human capacity
–
–
Fiscal policy
•
Monetary policy
Education
Health
•
Safety and security
•
Political institutions
•
Rule of law
20090515 – CAON Crotia.ppt
•
15
Copyright 2009 © Professor Michael E. Porter
Croatia’s Competitiveness
Progress on the Competitiveness Index
2007
2008
Estimated Ranking:
New Global Competitiveness Index
63
63
Macroeconomic Competitiveness
67
68
58
91
59
84
Microeconomic Competitiveness
60
69
GDP Per Capita Rank (ppp-adjusted)
48
48
Social Infrastructure and Political Institutions
Macroeconomic Policy
Note:
Rank versus 130 countries; overall, Croatia ranks 48th in 2008 PPP adjusted GDP per capita and 63rd in Global Competitiveness
Source: Institute for Strategy and Competitiveness, Harvard University (2009)
20090515 – CAON Crotia.ppt
16
Copyright 2009 © Professor Michael E. Porter
Governance Indicators
Selected Countries
Best
country in
the world
Voice and Accountability
Political Stability
Government Effectiveness
Regulatory Quality
Rule of Law
Control of Corruption
Index of
Governance
Quality,
2006
N
D
E
ET NM
H
ER AR
LA K
N
AU D S
ST
U
NI
R
I
TE RE IA
L
D
KI AN
D
N
G
U GE DO
NI
M
TE RM
A
D
ST NY
PO AT
R ES
TU
G
A
C
YP L
R
US
S
C
ZE SL PA
O IN
C
V
H
RE EN
PU IA
SL B L
O IC
VA
K
LA I A
LI TV
TH IA
UA
G NI
R
A
EE
PO CE
LA
N
C
RO D
BU AT
LG IA
R ARI
O
M A
AN
BR IA
AZ
IL
IN
D
I
C A
HI
NA
R
US
SI
A
Worst
country in
the world
Note: Sorted left to right by decreasing average value across all indicators. The ‘zero’ horizontal line corresponds to the median country’s average value across all indicators.
Source: World Bank (2008)
20090515 – CAON Crotia.ppt
17
Copyright 2009 © Professor Michael E. Porter
Corruption Perception Index, 2007
1
New Zealand
Finland
Sweden
Improving
Iceland
Switzerland
Norway
Canada
UK
Hong Kong Austria
Germany
Ireland
Japan
United States
France
Chile
Spain
Uruguay
Slovenia
Portugal
Estonia
Taiwan
Czech Republic
Hungary
South Korea
Malaysia
Italy
South Africa
Lithuania
Slovakia
Latvia
Jordan
Greece
Poland
Turkey
Croatia
Deteriorating
Low
corruption
Israel
Rank in
Global
Corruption
Index,
2007
Tunisia
Brazil
Peru
Panama
Egypt
Mexico
Colombia
China
Romania
Senegal
India
Thailand
Argentina
Tanzania
Ukraine
Vietnam
Philippines
Pakistan
Russia
High
corruption
Zimbabwe
91
Indonesia
Nigeria
Cote d’Ivoire
Bangladesh
Venezuela
-20
Uganda
-15
-10
-5
0
5
10
15
20
Change in Rank, Global Corruption Report, 2007 versus 2001
Note:
Ranks only countries available in both years (91 countries total)
20090515 –Global
CAON Crotia.ppt
Source:
Corruption Report, 2007
18
Copyright 2009 © Professor Michael E. Porter
Macroeconomic Competitiveness
• Croatia has a solid position in terms of basic human development
indicators, in line with many other former Communist countries
• Croatia has made some progress on macroeconomic policy
indicators, but the current global crisis will test the sustainability of
these improvements
– Croatia has been running high current account deficits for the last decade
• Croatia remains a regional laggard in terms of political and legal
institutional quality and there are few signs of fundamental
improvements
• Croatia’s government is much too big
• Croatia has much work to do to improve its macroeconomic
competitiveness, especially its institutions
20090515 – CAON Crotia.ppt
19
Copyright 2009 © Professor Michael E. Porter
Croatia’s Position
Microeconomic Competitiveness
2007
2008
60
69
National Business Environment
63
69
Company Operations and Strategy
58
64
Estimated Microeconomic Competitiveness Index
Note:
Rank versus 130 countries; overall, Croatia ranks 48th in 2008 PPP adjusted GDP per capita and 63rd in Global Competitiveness
Source: Institute for Strategy and Competitiveness, Harvard University (2009)
20090515 – CAON Crotia.ppt
20
Copyright 2009 © Professor Michael E. Porter
Microeconomic Competitiveness: Quality of the
Business Environment
Context
Contextfor
for
Firm
Firm
Strategy
Strategy
and
andRivalry
Rivalry

– e.g. salaries, incentives for
capital investments, intellectual
property protection, corporate
governance standards
Factor
Factor
(Input)
(Input)
Conditions
Conditions


–
–
–
–
–
Demand
Demand
Conditions
Conditions
Vigorous local competition
– Openness to foreign competition
– Competition laws
Access to high quality business
inputs
Natural endowments
Human resources
Capital availability
Physical infrastructure
Administrative and information
infrastructure (e.g. registration,
permitting, transparency)
– Scientific and technological
infrastructure
Local rules and incentives that
encourage investment and
productivity

Sophistication of local customers
and needs
Related
Relatedand
and
Supporting
Supporting
Industries
Industries

– e.g., Strict quality, safety, and
environmental standards
– Consumer protection laws
Availability of suppliers and supporting
industries
• Many things matter for competitiveness
• Successful economic development is a process of successive upgrading, in which the
business environment improves to enable increasingly sophisticated ways of competing
20090515 – CAON Crotia.ppt
21
Copyright 2009 © Professor Michael E. Porter
Factor
Factor
(Input)
(Input)
Conditions
Conditions
Factor (Input) Conditions
Croatia’s Relative Position 2008
Competitive Advantages
Relative to GDP per Capita
Competitive Disadvantages
Relative to GDP per Capita
Mobile telephone subscribers per 100
population
26
Protection of minority shareholders’
interests
Telephone lines per 100 population
30
Burden of government regulation
97
Quality of roads
30
Time required to start a business
91
Quality of math and science education
35
Venture capital availability
87
Internet users per 100 population
35
Quality of port infrastructure
84
Utility patents per million population
36
Quality of air transport infrastructure
83
Ease of starting a new business
42
Ease of access to loans
81
Personal computers per 100 population
43
Brain drain
80
Quality of telephone infrastructure
44
Quality of management schools
76
Quality of electricity supply
44
Regulation of securities exchanges
74
Quality of railroad infrastructure
44
Financial market sophistication
71
Number of procedures required to start a
business
44
Burden of customs procedures
63
Quality of scientific research institutions
47
Quality of the educational system
62
Demand conditions
61
Soundness of banks
60
University-industry research collaboration
51
Tertiary enrollment
49
Change up/down of more
than 5 ranks since 2007
101
Note:
Rank versus 130 countries; overall, Croatia ranks 48th in 2008 PPP adjusted GDP per capita and 63rd in Global Competitiveness
Source: Institute for Strategy and Competitiveness, Harvard University (2009)
20090515 – CAON Crotia.ppt
22
Copyright 2009 © Professor Michael E. Porter
Context
Contextfor
forFirm
Firm
Strategy
Strategy
and
andRivalry
Rivalry
Context for Strategy and Rivalry
Croatia’s Relative Position 2008
Competitive Advantages
Relative to GDP per Capita
Low Tariff rates
34
Change up/down of more
than 5 ranks since 2007
•
Note:
Competitive Disadvantages
Relative to GDP per Capita
Business impact of rules on FDI
Cooperation in labor-employer relations
Low market disruption from state-owned
enterprises
Impact of taxation on incentives to work and
invest
Rigidity of employment
Effectiveness of antitrust policy
Extent of market dominance by business
groups
Efficacy of corporate boards
Strength of investor protection
Pay and productivity
Distortive effect of taxes and subsidies on
competition
Restrictions on capital flows
Strength of auditing and reporting standards
Prevalence of trade barriers
Intensity of local competition
Intellectual property protection
Regulatory quality
103
102
98
98
98
95
88
80
76
76
73
71
68
54
On some indicators, Croatia is ranked at the level of some African countries
Rank versus 130 countries; overall, Croatia ranks 48th in 2008 PPP adjusted GDP per capita and 63rd in Global Competitiveness
23
Strategy and Competitiveness, Harvard University (2009)
20090515
Crotia.ppt
Source:– CAON
Institute
for
114
110
110
Copyright 2009 © Professor Michael E. Porter
Doing Business Indicators
Ranking, 2009
(of 181 countries)
Favorable
Unfavorable
180
160
Median Ranking, Central
EU countries*
140
120
100
80
60
Croatia’s per capita GDP rank: 46
40
20
0
Ease of
Doing
Business
Paying
Taxes
Enforcing
Contracts
Getting
Credit
Closing a
Business
Trading
Across
Borders
Registering Starting a Protecting Employing
Property Business Investors Workers
Dealing
with
Licenses
* Central European EU countries include: Austria, Bulgaria, the Czech Republic, Estonia, Greece, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia
Source: World Bank Report, Doing Business (2009)
20090515 – CAON Crotia.ppt
24
Copyright 2009 © Professor Michael E. Porter
Demand
Demand
Conditions
Conditions
Demand Conditions
Croatia’s Relative Position 2008
Competitive Advantages
Relative to GDP per Capita
Competitive Disadvantages
Relative to GDP per Capita
Buyer sophistication
92
Government success in ICT promotion
76
Government procurement of advanced
technology products
68
Presence of demanding regulatory
standards
67
Stringency of environmental regulations
54
Change up/down of more
than 5 ranks since 2007
Note:
Rank versus 130 countries; overall, Croatia ranks 48th in 2008 PPP adjusted GDP per capita and 63rd in Global Competitiveness
Source: Institute for Strategy and Competitiveness, Harvard University (2009)
20090515 – CAON Crotia.ppt
25
Copyright 2009 © Professor Michael E. Porter
Croatia’s Business Environment Quality
Overview
• Basic factor conditions are relatively strong but weaknesses exist in
more advanced dimensions
– Relative strength in road transportation and communications infrastructure
as well as fundamental innovative capacity
– Relative strength in primary and secondary education
– Relative weakness in financial market sophistication
– Relative weakness in port and airport infrastructure
• Business rules and regulations remain cumbersome and distortive
– Problematic labor relations
– Local market still dominated by entrenched domestic business groups
– Rules and regulations for foreign direct investors are cumbersome
20090515 – CAON Crotia.ppt
26
Copyright 2009 © Professor Michael E. Porter
Competitiveness and Cluster Development
Tourism Cluster in Cairns, Australia
Public
Public Relations
Relations &&
Market
Market Research
Research
Services
Services
Travel
Travel agents
agents
Tour
Tour operators
operators
Restaurants
Restaurants
Attractions
Attractions and
and
Activities
Activities
Food
Food
Suppliers
Suppliers
e.g.,
e.g., theme
theme parks,
parks,
casinos,
casinos, sports
sports
Property
Property
Services
Services
Maintenance
Maintenance
Services
Services
Airlines,
Airlines,
Cruise
Cruise Ships
Ships
Hotels
Hotels
Local
Local retail,
retail,
health
health care,
care, and
and
other
other services
services
Local
Local
Transportation
Transportation
Souvenirs,
Souvenirs,
Duty
Duty Free
Free
Banks,
Banks,
Foreign
Foreign
Exchange
Exchange
Government
Government agencies
agencies
Educational
Educational Institutions
Institutions
Industry
Industry Groups
Groups
e.g.
e.g. Australian
Australian Tourism
Tourism Commission,
Commission,
Great
Barrier
Reef
Authority
Great Barrier Reef Authority
e.g.
e.g. James
James Cook
Cook University,
University,
Cairns
College
of
Cairns College of TAFE
TAFE
e.g.
e.g. Queensland
Queensland Tourism
Tourism
Industry
Council
Industry Council
Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden
20090515 – CAON Crotia.ppt
27
Copyright 2009 © Professor Michael E. Porter
The Australian Wine Cluster
Trade Performance
Australian Wine
Exports in thousand US $
Australian Wine
World Export Market
Share
$2,700,000
$2,400,000
10.0%
Value
Market Share
$2,100,000
8.0%
$1,800,000
$1,500,000
6.0%
$1,200,000
4.0%
$900,000
$600,000
2.0%
$300,000
$0
0.0%
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
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.
20090515 – CAON Crotia.ppt
28
Copyright 2009 © Professor Michael E. Porter
The Australian Wine Cluster
History
1991 to 1998
1930
1965
1980
First oenology
course at
Roseworthy
Agricultural
College 1955
Australian Wine
Bureau
established
Australian Wine
and Brandy
Corporation
established 1990
1970
New organizations
created for education,
research, market
information, and
export promotions
Winemaker’s
Federation of
Australia
established
Winemaking
school at Charles
Sturt University
founded
Australian Wine
Research
Institute founded
1950s
1960s
1970s
1980s
1990s
Import of
European winery
technology
Recruiting of
experienced
foreign investors,
e.g. Wolf Bass
Continued inflow
of foreign capital
and
management
Creation of
large number of
new wineries
Surge in exports
and international
acquisitions
Source: Michael E. Porter and Örjan Sölvell, The Australian Wine Cluster – Supplement, Harvard Business School Case Study, 2002
20090515 – CAON Crotia.ppt
29
Copyright 2009 © Professor Michael E. Porter
The Evolution of Regional Economies
San Diego
Hospitality and Tourism
Climate
Climate
and
and
Geography
Geography
Sporting and
Leather Goods
Transportation
and Logistics
Power Generation
Communications
Equipment
Aerospace Vehicles
and Defense
U.S.
U.S.
Military
Military
Information Technology
Analytical Instruments
Education and
Knowledge Creation
Medical Devices
Bioscience
Bioscience
Research
Research
Centers
Centers
1910
20090515 – CAON Crotia.ppt
1930
1950
Biotech / Pharmaceuticals
1970
30
1990
Copyright 2009 © Professor Michael E. Porter
Related
Relatedand
and
Supporting
Supporting
Industries
Industries
Related and Supporting Industries
Croatia’s Relative Position 2008
Competitive Advantages
Relative to GDP per Capita
Competitive Disadvantages
Relative to GDP per Capita
State of cluster development
105
Extent of collaboration in clusters
98
Local supplier quantity
88
Supporting and related industries and
clusters
77
Local supplier quality
72
Local availability of process machinery
61
Change up/down of more
than 5 ranks since 2007
Note:
Rank versus 130 countries; overall, Croatia ranks 48th in 2008 PPP adjusted GDP per capita and 63rd in Global Competitiveness
Source: Institute for Strategy and Competitiveness, Harvard University (2009)
20090515 – CAON Crotia.ppt
31
Copyright 2009 © Professor Michael E. Porter
National Cluster Export Portfolio
Croatia, 1997 to 2007
0.5%
Change In Croatia’s Overall
World Export Share: 0.029%
Hospitality and Tourism (1.11%)
Power and Power Generation Equipment
Marine Equipment
(0.85% ,1.26%)
Croatia’s world export market share, 2007
Tobacco
0.4%
Construction Materials
Prefabricated Enclosures and Structures
Furniture
0.3%
Footwear (-0.34%)
Communication Services
Building Fixtures and Equipment
Transportation and Logistics
Leather and Related Products
Processed Foods
0.2%
Croatia’s Average World
Export Share: 0.16%
Fishing and Fishing Related Products
Apparel
Forest Products
Business Services
0.1%
Construction Services
Plastics
Publishing and Printing
Agriculture Products
Oil and Gas
Heavy Machinery
Biopharmaceuticals
Production Technology
Light and Elec. Equipment
Metal, Mining and Manufacturing
Communications Equipment
Jewelry, Precious Metals and Collectibles
Analytical Instruments
Chemical Products
Automotive
Information Technology
Financial Services
Entertainment
0.0%
-0.2%
-0.1%
0.0%
0.1%
0.2%
0.3%
0.4%
Change in Croatia’s world export market share, 1997 to 2007
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.
32
20090515 – CAON Crotia.ppt
0.5%
0.6%
Exports of US$1.5 Billion =
Copyright 2009 © Professor Michael E. Porter
Croatian Maritime Cluster
Worldwide Shipping
and Logistics
Industry
Local Transport
Industry
(Ferries)
Yacht Retail
(Europe)
Related Cluster:
Adriatic Tourism
Specialized Suppliers
6’500 employees
Engines
Design /
Archit.
Technical
Equipment
Fittings
Coatings
R&D
Supporting Industries
1’800 companies / 26’000
employees
Plastics
Metal
Related Clusters:
Automotive / Metal
Processing
Shipbuilding
Boatbuilding
6 companies
~ 20 ships p.a.
11’000 employees
Value added: USD
750 million p.a.
~ 70 companies
(commercial, yachts,
“nutshell”)
Value added: USD 80
million p.a.
Government
Agencies
• Ministry of Economy,
Labor and
Entrepreneurship
• Ministry of Sea, Tourism
and Transport
• Croatian Privatization
Fund
Universities
• University of
Engineering and
Boatbuilding, Zagreb
• University of
Boatbuilding, Split
Industry Associations
Trade Unions
• Brodarski Institut
• Boatbuilding Association at Croatian
Chamber of Commerce
• Association of Boat Equipment
Producers at Croatian Chamber of
Commerce
• Shipbuilding Cluster at Croatian
Employers Association.
• Association of Metal
Workers
• Association of
Workers Trade
Unions of Croatia
• Croatian Trade Union
Association
• ...
Sources: Harvard Microeconomics of Competitiveness student team research (2009) - Jetemir Balaj, Neil McCullagh, Mirela Mrvelj, Peder Plaz, Malgorzata Steiner
20090515 – CAON Crotia.ppt
33
Copyright 2009 © Professor Michael E. Porter
Shipbuilding Cluster Productivity
Select European Countries
20090515 – CAON Crotia.ppt
34
Copyright 2009 © Professor Michael E. Porter
Croatian Clusters
• Croatia’s clusters have developed naturally and reflect the strengths
of legacy and location but also the challenges of the current business
environment conditions
• Clusters provide an important perspective to understand the issues
facing the Croatian economy
• Cluster-level competitiveness efforts are less politicized and enable
action on more tractable issues related to productivity
• Cluster efforts are an opportunity to engage in a new model of publicprivate dialogue and cooperation
• Clusters are so far an unexploited dimension of economic policy
that Croatia can ill-afford to neglect
20090515 – CAON Crotia.ppt
35
Copyright 2009 © Professor Michael E. Porter
Cluster-Based Policy Implementation
Science and Technology
Investments
(e.g., centers, university
departments, technology
transfer)
Education and
Workforce Training
Management Training
Standard setting and
quality initiatives
Business Attraction
Clusters
Environmental
Stewardship
Export Promotion
Market Information
and Disclosure
Natural Resource
Protection
Physical
Infrastructure
• Clusters provide a framework for implementing public policy and
organizing public-private collaboration to enhance competitiveness
20090515 – CAON Crotia.ppt
36
Copyright 2009 © Professor Michael E. Porter
Geographic Levels and Competitiveness
World Economy
WTO
Broad Economic Areas
Europe
Groups of
Neighboring Nations
20090515 – CAON Crotia.ppt
Southeast Europe
Nations
Croatia
States, Provinces
Regions
Metropolitan and Rural Areas
Zagreb
37
Copyright 2009 © Professor Michael E. Porter
Specialization by Traded Clusters
Selected U.S. Economic Areas, 2006
Denver,
Denver,CO
CO
Entertainment
Entertainment
Medical
MedicalDevices
Devices
Oil
Oiland
andGas
GasProducts
Productsand
andServices
Services
Hospitality
Hospitalityand
andTourism
Tourism
Chicago,
Chicago,IL-IN-WI
IL-IN-WI
Metal
MetalManufacturing
Manufacturing
Biopharmaceuticals
Biopharmaceuticals
Chemical
ChemicalProducts
Products
Lighting
Lightingand
andElectrical
ElectricalEquipment
Equipment
Pittsburgh,
Pittsburgh,PA
PA
Education
Educationand
andKnowledge
KnowledgeCreation
Creation
Metal
MetalManufacturing
Manufacturing
Chemical
ChemicalProducts
Products
Lighting
Lightingand
andElectrical
ElectricalEquipment
Equipment
Boston,
Boston,MA-NH
MA-NH
Analytical
AnalyticalInstruments
Instruments
Education
Educationand
andKnowledge
KnowledgeCreation
Creation
Medical
Devices
Medical Devices
Financial
FinancialServices
Services
Seattle,
Seattle,WA
WA
Aerspoace
AerspoaceVehicles
Vehiclesand
andDefense
Defense
Information
Technology
Information Technology
Entertainment
Entertainment
Financial
FinancialServices
Services
New
NewYork,
York,NY-NJ-CT-PA
NY-NJ-CT-PA
Financial
FinancialServices
Services
Biopharmaceuticals
Biopharmaceuticals
Apparel
Apparel
Publishing
Publishingand
andPrinting
Printing
San
SanJose-San
Jose-SanFrancisco,
Francisco,CA
CA
Business
BusinessServices
Services
Agricultural
AgriculturalProducts
Products
Communications
CommunicationsEquipment
Equipment
Biopharmaceuticals
Biopharmaceuticals
Los
LosAngeles,
Angeles,CA
CA
Entertainment
Entertainment
Apparel
Apparel
Distribution
DistributionServices
Services
Hospitality
Hospitalityand
andTourism
Tourism
San
SanDiego,
Diego,CA
CA
Analytical
AnalyticalInstruments
Instruments
Hospitality
Hospitalityand
andTourism
Tourism
Medical
Devices
Medical Devices
Education
Educationand
andKnowledge
KnowledgeCreation
Creation
Raleigh-Durham,
Raleigh-Durham,NC
NC
Education
Educationand
andKnowledge
KnowledgeCreation
Creation
Biopharmaceuticals
Biopharmaceuticals
Communications
CommunicationsEquipment
Equipment
Motor
MotorDriven
DrivenProducts
Products
Dallas
Dallas
Aerospace
AerospaceVehicles
Vehiclesand
andDefense
Defense
Oil
and
Gas
Products
Oil and Gas Productsand
andServices
Services
Information
InformationTechnology
Technology
Transportation
Transportationand
andLogistics
Logistics
Houston,
Houston,TX
TX
Oil
Oiland
andGas
GasProducts
Productsand
andServices
Services
Chemical
Products
Chemical Products
Heavy
HeavyConstruction
ConstructionServices
Services
Transportation
Transportationand
andLogistics
Logistics
Atlanta,
Atlanta,GA
GA
Transportation
Transportationand
andLogistics
Logistics
Textiles
Textiles
Construction
ConstructionMaterials
Materials
Plastics
Plastics
Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director.
38
20090515 – CAON Crotia.ppt
Copyright 2009 © Professor Michael E. Porter
Croatian Counties
20090515 – CAON Crotia.ppt
39
Copyright 2009 © Professor Michael E. Porter
Prosperity Performance
Croatian Counties
GDP per Capita,
2008 (€)
$18,000
Croatia Average: 10.13%
Zagreb (city)
$16,000
$14,000
$12,000
Istria
Primorje-Gorski Kotar
Lika-Senj
$10,000
Varazdin
Koprivnica-Krizevci
Croatia Average: $9,400
$8,000
Sisak-Moslavina
Split-Dalmatia
Osijek-Baranja
$6,000
Zagreb (county) Medjimurje
Karlovac
Bjelovar-Bilogora
Dubrovnik-Neretva
Zadar
Krapina-Zagorje
Virovitica-Podravina
Pozega-Slavonia
Sibenik-Knin
Brod-Posavina
Vukovar-Srijem
$4,000
8%
9%
10%
11%
12%
13%
14%
15%
Growth of GDP per Capita (€), CAGR, 2005 to 2008
Source: Croatia Central Bank, Croatia Statistical Institute
20090515 – CAON Crotia.ppt
40
Copyright 2009 © Professor Michael E. Porter
The Neighborhood
Southeastern Europe
• Economic coordination among neighboring countries can significantly enhance competitiveness
20090515 – CAON Crotia.ppt
41
Copyright 2009 © Professor Michael E. Porter
Croatia’s Competitiveness Challenge
• Croatia’s recent economic growth has been driven by natural catch-up
following integration into the European and global economy
• Process can only be sustained if Croatia is able to continuously upgrade its
competitiveness
• EU accession is an important opportunity, but the benefits will depend on
reforms by Croatia to address its own competitiveness challenges
Key Challenges
• There are numerous weaknesses in the Croatian business environment
• The vitality of competition remains weak as a consequence of policy choices
and a relatively isolated domestic market
• Clusters are present in the Croatian economy (e.g. tourism), but they have not
been used as an effective policy tool
• The institutional weaknesses of the country have been a key barrier to
achieve sustain improvements
• Croatian regions have not been challenged and enabled to contribute to
competitiveness improvements
20090515 – CAON Crotia.ppt
42
Copyright 2009 © Professor Michael E. Porter
Croatia’s Competitiveness Agenda
Some Action Priorities
• Address corruption and weaknesses in political and legal
institutions
• Ensure the sustainability of public finances
• Reform the rules and regulations for business
• Open up local markets to competition
• Create attractive conditions for foreign investors
• Strengthen the higher education system, financial markets, and
airport/port infrastructure
• Use clusters as an organizing principle for upgrading workforce
skills, infrastructure, and FDI attraction
• Support Croatian regions in their competitiveness efforts
• Strengthen economic cooperation in South-East Europe
20090515 – CAON Crotia.ppt
43
Copyright 2009 © Professor Michael E. Porter
The Process of Economic Development
Shifting Roles and Responsibilities
Old
Old Model
Model
New
New Model
Model
•• Government
Government drives
drives economic
economic
development
development through
through policy
policy
decisions
decisions and
and incentives
incentives
•• Economic
Economic development
development is
is aa
collaborative
collaborative process
process involving
involving
the
the private
private sector,
sector, government
government at
at
multiple
multiple levels,
levels, universities,
universities,
labor,
labor, and
and civil
civil society
society
• Competitiveness must become a bottoms-up process in which many
individuals, companies, and institutions take responsibilities
• Every community and cluster can take steps to enhance competitiveness
• The private sector must become more engaged in competitiveness to
improve rapidly
20090515 – CAON Crotia.ppt
44
Copyright 2009 © Professor Michael E. Porter
Defining a Croatian Economic Strategy
National
NationalEconomic
EconomicStrategy
Strategy
•
What can be the unique competitive position of Croatia given
its location, legacy, endowments, and potential strengths?
– What is its unique value as a business location?
– What role can it play with neighbors?
– In what range of clusters does the nation excel?
Achieving
Achievingand
andMaintaining
MaintainingParity
Parity
with
withPeers
Peers
Developing
DevelopingUnique
UniqueStrengths
Strengths
• What are the key potential strengths
that Croatia must preserve or build?
• What weaknesses must be neutralized to
achieve parity with peer countries?
• The private sector must lead the process of competitiveness
improvement and provide continuity and accountability
20090515 – CAON Crotia.ppt
45
Copyright 2009 © Professor Michael E. Porter
The Croatian Competitiveness Paradox
• Croatia has institutions like the National Competitiveness Council
designed to guide competitiveness upgrading
• Croatia has sensible plans that identify the weaknesses the country
needs to address
BUT
• Croatia has made limited if any progress on upgrading its
competitiveness in recent years
• Government is preoccupied with short-term crises and EU acsencion
20090515 – CAON Crotia.ppt
46
Copyright 2009 © Professor Michael E. Porter
The Moment For Action
• The struggle for independence, the war with Serbia, and the path to
political normality after the war have shifted political focus away from
competitiveness
• Economic growth due to a natural catch-up has been sufficiently good
so that there has not been pressure for real reform
• EU membership has been seen as the automatic path to
competitiveness, requiring no further action within the country
• Entrenched interest groups in the political and economic sphere
have paid lip service to competitiveness but have been unwilling to
engage in real reforms that threaten the status quo
• Leaders in business and government must launch a new chapter in
Croatia’s economy if the country is to hold its gains, much less see
further standard of living improvements
20090515 – CAON Crotia.ppt
47
Copyright 2009 © Professor Michael E. Porter