Regions and Competitiveness:
Implications for Saudi Arabia
Professor Michael E. Porter
Global Competitiveness Forum
Riyadh, Saudi Arabia
January 26, 2010
This presentation draws on ideas from Professor Porter’s articles and books, including, The Competitive Advantage of Nations (The Free Press,
1990), “The Microeconomic Foundations of Economic Development,” in The Global Competitiveness Report, (World Economic Forum), “Clusters
and the New Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 2008) and ongoing
research at the Institute for Strategy and Competitiveness. 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. Further information on Professor Porter’s work and the Institute for Strategy and Competitiveness is available at www.isc.hbs.edu,
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Copyright 2010 © Professor Michael E. Porter
Saudi-Arabia’s Competitiveness Agenda
• Saudi-Arabia has embarked on an ambitious effort to upgrade its
competitiveness
• While significant progress has been made, achieving competitiveness
remains a long term challenge
• Greater economic integration of the Gulf region is an unfulfilled
opportunity to enhance competitiveness in all the Gulf countries while
accelerating the pace of domestic reform
• Achieving greater economic integration in the broader region beyond
the GCC will also be crucial to Saudi Arabia’s stability and long term
economic potential
• Saudi Arabia has the opportunity, and the obligation, to play a
leadership role
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Copyright 2010 © Professor Michael E. Porter
What is Competitiveness?
• Competitiveness depends on the productivity with which a
nation uses its human, capital, and natural resources.
• 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
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Copyright 2010 © Professor Michael E. Porter
What Determines 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
Endowments
• 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
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Copyright 2010 © Professor Michael E. Porter
Geographic Influences on Competitiveness
Neighboring Countries
Nations
States and Cities
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Copyright 2010 © Professor Michael E. Porter
Why the Region Matters
• A nation’s most natural trading and investment partners are its
neighbors
• A nation’s economic growth and prosperity can be greatly
enhanced by a healthy neighborhood, and vice-versa
– Larger, growing, and accessible markets for local firms, especially for
those with limited international experience
– The effect of neighbors on a country’s reputation and image
• National productivity can be greatly enhanced through regional
coordination of economic policies
• Regional integration makes all nations more attractive as locations
for FDI
• A regional approach creates greater weight in international
relations
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Copyright 2010 © Professor Michael E. Porter
Models of Regional Economic Cooperation
Traditional model
Broader model
Market
Opening
Competitiveness
Upgrading
• Countries create free
trade areas,
customs unions or
common markets
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• Opening trade and
investment
• Regional cooperation
on multiple
dimensions of
competitiveness to
gain mutual benefits
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Copyright 2010 © Professor Michael E. Porter
Competitiveness Upgrading Among Neighbors
Capturing Synergies
Business Environment
• Improving efficiency and interconnectivity of
transportation infrastructure
• Enhancing regional communications
• Creating an efficient energy network
Macroeconomic
Policy
• Coordinating
macroeconomic
policies
• Linking financial markets
• Regional
development bank
• Opening the movement of students for
training or higher education
• Coordinated capital
requirements
• Eliminating trade and investment barriers
within the region
Political Institutions and
Governance
• Sharing best practices in
government operations
• Creating regional
institutions
– Dispute resolution
mechanisms
– Harmonizing economic
statistics
• Developing a regional
position with international
organizations
• Simplifying and harmonizing cross-border
regulations, paperwork and visas
• Coordinating antitrust and competition
policies
• Harmonizing environmental and energy
standards
• Harmonizing product safety standards
• Establishing reciprocal consumer protection
laws
• Opening government procurement within
the region
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Copyright 2010 © Professor Michael E. Porter
Cross Border Economic Cooperation at Different Levels
Neighboring
Countries
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Wider Regions
(e.g., APEC)
9
World Community
(e.g., WTO)
Copyright 2010 © Professor Michael E. Porter
Regional Groupings Involving Saudi Arabia
Gulf Cooperation Council (GCC)
Kuwait
Bahrain
Kingdom of Saudi Arabia
Qatar
UAE
Oman
Source: BYU Geography, 2002
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Copyright 2010 © Professor Michael E. Porter
Regional Groupings Involving Saudi Arabia
Arab League
Syria
Tunisia
Lebanon
Jordan
Morocco
Iraq
Kuwait
Bahrain
Algeria
Qatar
Egypt
Libya
Kingdom of
Saudi Arabia
UAE
Mauritania
Oman
Sudan
Yemen
Djibouti
Somalia
Source: BYU Geography, 2002
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Copyright 2010 © Professor Michael E. Porter
Regional Groupings Involving Saudi Arabia
Greater Arab Free Trade Zone
Syria
Tunisia
Lebanon
Jordan
Morocco
Iraq
Kuwait
Bahrain
Algeria
Qatar
Egypt
Libya
Kingdom of
Saudi Arabia
UAE
Mauritania
Oman
Sudan
Yemen
Djibouti
Somalia
Arab League
Greater Arab Free Trade Zone (GAFTZ)
Source: BYU Geography, 2002
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Copyright 2010 © Professor Michael E. Porter
Profile of the GCC and Broader Neighborhood
Selected Indicators, 2009 (estimated)
GDP
(billions, US$ at PPP)
Population
(millions)
GDP Per Capita
(US$ at PPP)
Bahrain
$28.3
1.1
$25,100
Oman
69.9
3.0
23,480
Qatar
101.3
1.6
62,060
Kuwait
142.3
3.5
40,930
United Arab Emirates
186.7
5.4
34,350
Saudi Arabia
594.4
25.5
23,270
GCC
$1,122.9
40.2
$27,937
Egypt
$470.3
83.1
$5,660
Iraq
120.2
30.7
3,910
Jordan
32.4
6.3
5,170
Sudan
93.5
42.3
2,210
Yemen
62.0
23.6
2,630
• As the largest economy in the GCC, Saudi-Arabia is the natural leader with a
critical role for ensuring progress in regional collaboration
Source: EIU (2010)
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Copyright 2010 © Professor Michael E. Porter
History of Regional Collaboration in the GCC
• The Gulf Cooperation Council (GCC) was created in 1981 with the
ambition to achieve “unity” across its six member countries
• Activities have concentrated on trade and monetary affairs, with
selected attention to other policy areas
–
–
–
–
FTA (1983), Customs Union (2003), Common Market (2008)
GCC Patents Office (1998)
No visa’s for GCC citizens
Plans for a Currency Union
• Broad aspirations
• Modest progress
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Copyright 2010 © Professor Michael E. Porter
Competitiveness Challenges Facing the GCC
Prosperity Performance
PPP-adjusted GDP per Capita,
2009 (estimated)
$35,000
Kuwait ($40,930)
Qatar ($60,200)
France
Denmark
Italy
$30,000
UK Finland
Germany
Japan
Norway ($55,560)
Taiwan
UAE
Spain
GCC countries
Israel
Other countries
Korea
Slovenia
New Zealand
Bahrain
$25,000
Arab League
Greece
Czech Republic
Oman
Saudi Arabia
Portugal
Slovakia
$20,000
Hungary
Poland
Estonia
Argentina
$15,000
Mexico
Malaysia
Lebanon
World Average: $11,070
Brazil
$10,000
$5,000
Libya
Croatia
$0
1%
South Africa
Colombia
Algeria
Thailand
Latvia
Turkey
2%
3%
4%
5%
6%
Bulgaria Belarus (10.5%)
Kazakhstan
Romania
Iran
Tunisia
Egypt
Jordan
Morocco
Syria
Philippines
Yemen
Pakistan
World Average: 4.69%
Iraq (-0.40%)
0%
Chile
Lithuania
Russia
Peru
China (12.7%)
Ukraine
Sri Lanka
Indonesia
India
Sudan
7%
8%
Georgia
Vietnam
9%
10%
Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2001 to 2009 (estimated)
Source: EIU (2010), authors calculations
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Copyright 2010 © Professor Michael E. Porter
Comparative Performance of Selected Regional Groups
PPP-adjusted GDP per
Capita, 2009 (estimated)
$40,000
NAFTA
Scandinavia World Average: 4.69%
$35,000
Western Europe
European Union
(27 countries)
$30,000
GCC
$25,000
$20,000
Eastern Europe
Baltic Region
$15,000
Balkans
Latin America
World Average: $11,070
$10,000
SACU
Andean Community
MERCOSUR
North Africa
$5,000
ASEAN
Sub-Saharan Africa
South Asia
$0
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2001 to 2009 (estimated)
Source: EIU (2010), authors calculations
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Copyright 2010 © Professor Michael E. Porter
Competitiveness Issues Facing the GCC:
Common Challenges
• Pressing need for job creation
• Need to improve the quality of education and health care
• Presence of large expatriate populations
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Copyright 2010 © Professor Michael E. Porter
Role of Nationals in the Workforce
GCC countries, 2005
Nationals employed in
the private sector (%)
100
90
80
70
60
50
40
30
20
10
No Data
Available
0
Bahrain
Oman
Saudi Arabia
Kuwait
Qatar
United Arab
Emirates
Source: Conference Board, Growing From Oil, 2008
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Copyright 2010 © Professor Michael E. Porter
Competitiveness Issues Facing the GCC:
Common Challenges
• Pressing need for job creation
• Need to improve the quality of education and health care
• Presence of large expatriate populations
• Increasing economic diversification
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Copyright 2010 © Professor Michael E. Porter
Share of Total Exports by Broad Cluster
GCC, 2007
Export Share of Total
100%
Other
90%
Textiles and Apparel
80%
Jewelry & Precious
Metals
Agriculture and Food
70%
Metal Mining and
Manufacturing
Building and Construction
60%
50%
Communications Services
40%
Financial Services
30%
20%
Transportation and
Logistics
Business Services
10%
Plastics
Chemical Products
0%
Saudi
Arabia
Bahrain
Kuwait
Oman
Note: Qatar and United Arab Emirates have not reported services export data
Source: Institute for Strategy and Competitiveness (2010), author’s calculations
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Qatar *
United
Arab
Emirates *
Oil and Gas Products
Copyright 2010 © Professor Michael E. Porter
Competitiveness Issues Facing the GCC:
Common Challenges
• Pressing need for job creation
• Need to improve the quality of education and health care
• Presence of large expatriate populations
• Increasing economic diversification
• Need to improve government effectiveness and transparency
• Continue to streamline business regulation
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Copyright 2010 © Professor Michael E. Porter
Doing Business
Northern Africa and Middle Eastern Countries
Economy
Saudi Arabia
Ease of
Doing
Business
13
13
33
73
1
61
16
7
Trading
Across
Borders
23
Starting a
Business
Dealing with Employing Registering
Licenses
Workers
Property
Getting
Credit
Protecting
Investors
Paying
Taxes
Enforcing
Contracts
Closing a
Business
140
60
Bahrain
20
63
14
13
22
87
57
13
32
117
26
United Arab Emirates
33
44
27
50
7
71
119
4
5
134
143
Qatar
39
68
28
68
55
135
93
2
41
95
33
Kuwait
61
137
81
24
89
87
27
11
109
113
69
Oman
65
62
130
21
20
127
93
8
123
106
66
Tunisia
69
47
107
108
59
87
73
118
40
77
34
Yemen, Rep.
99
53
50
74
50
150
132
148
120
35
89
Jordan
100
125
92
51
106
127
119
26
71
124
96
Egypt
106
24
156
120
87
71
73
140
29
148
132
Lebanon
108
108
125
66
111
87
93
34
95
121
124
Morocco
128
76
99
176
123
87
165
125
72
108
67
Algeria
136
148
110
122
160
135
73
168
122
123
51
Iran
137
48
141
137
153
113
165
117
134
53
109
West Bank and Gaza
139
176
157
135
73
167
41
28
92
111
183
Syria
143
133
132
91
82
181
119
105
118
176
87
Iraq
153
175
94
59
53
167
119
53
180
139
183
Djibouti
163
177
102
151
140
177
178
65
34
161
135
Middle East & North
Africa
91.6
90.1
94.6
85.7
80.9
111.6
92.6
66.1
76.4
114.7
90.9
Rank out of 178 countries.
Source: World Bank Doing Business (2009).
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Copyright 2010 © Professor Michael E. Porter
Competitiveness Issues Facing the GCC:
Common Challenges
• Pressing need for job creation
• Need to improve the quality of education and health care
• Presence of large expatriate populations
• Increasing economic diversification
• Need to improve government effectiveness and transparency
• Continue to streamline business regulation
• Need to improve transparency and corporate governance
• Lack of economic statistics
• Limited scientific and technological capability
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Copyright 2010 © Professor Michael E. Porter
Enhancing Regional Strategy for the GCC
Expand Internal Trade
Improve Competitiveness
Issue
Opportunity
• GCC countries have similar
economic structures
• GCC countries have common
challenges
• There are efficiencies and synergies
of coordination in many areas
• History of viewing economic
coordination as a win-lose
proposition
• Governments can retain sovereignty
while making changes faster and
more efficiently
• Governments are reluctant to
cede autonomy
• Regional economic agreements help
overcome domestic political and
economic barriers to progress
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Copyright 2010 © Professor Michael E. Porter
Next Steps
Potential Agenda Items
•
Improve infrastructure interconnectivity (e.g., logistics, energy, air, communications,
etc.) through alignment of investments and procedures
•
Harmonize rules for public procurement and participation in government-financed
development projects
•
Common policy framework for governance of government-linked companies
•
Harmonize product and service regulations and standards
•
Simplify/eliminate cross-border paperwork
•
Common economic statistics and reporting mechanisms
•
Research collaboration
•
Policy benchmarking and learning in areas such as education system improvement,
cluster development, SME development, workforce skills, legal reform, public sector
management, etc.
Process
•
Commit to more frequent meetings of leaders and ministerial working groups to drive a
GCC Competitiveness Action Agenda, with rotating chairmanship
•
Create formal participation by the private sector, including both local companies and
multinational corporations
– Business Advisory Council-model such as in APEC, EU, etc.
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Copyright 2010 © Professor Michael E. Porter
The Role of Saudi Arabia in the GCC
• As the largest economy, Saudi Arabia has a special responsibility for
regional development
• Progress will be fastest if Saudi Arabia can shift the mindset in the
region from competition to the pursuit of mutual benefit
• To speed up progress, Saudi Arabia should pursue concrete, bilateral
steps to enhance competitiveness and build confidence
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Copyright 2010 © Professor Michael E. Porter
Broader Integration
• The economic benefits of integration will be even greater if it includes a
wider set of countries
– Some steps began with Yemen in 2001/2002
• Integration which improves the economic prospects of lower income
neighbors will also help to mitigate conflicts and address longer
term instability
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Copyright 2010 © Professor Michael E. Porter