Entrepreneurship and Competitiveness:
Implications for Saudi Arabia
Professor Michael E. Porter
Harvard Business School
Global Competitiveness Forum
Riyadh, Saudi Arabia
January 24, 2012
This presentation draws on ideas from Professor Porter’s articles and books, in particular, The Competitive Advantage of Nations (The Free Press, 1990),
“Building the Microeconomic Foundations of Competitiveness,” 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 on clusters 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
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson
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Copyright 2012 © Professor Michael E. Porter
The World Economy in Early 2012
• A weak macroeconomic environment is constraining growth in the
global economy (e.g., Europe, US, China)
– Failures of political leadership
• However, sustainable fiscal policies are necessary but not sufficient
to restore healthy growth
• The only way to ensure long term job and prosperity growth is through
fundamental improvement in competitiveness, especially for higher
income economies
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson
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Copyright 2012 © Professor Michael E. Porter
What is Competitiveness?
•
Competitiveness is manifested in the ability of companies operating in a country or region
to compete successfully in international markets while simultaneously improving the
living standards of citizens
•
Competitiveness depends on the long term productivity with which a nation uses its
human, capital, and natural resources
– Competitiveness is not achieved through low wages or low currency
– Productivity sets sustainable wages and standard of living
– 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 benefits from a combination of domestic and
foreign firms
•
Competitive businesses create rising incomes and good jobs
•
Nations compete to offer the most productive environment for business
•
Competitiveness is not a zero sum game
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson
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Copyright 2012 © 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
Development
and Political
Institutions
Macroeconomic
Policies
Endowments
•
Productivity ultimately depends on improving the microeconomic capability of the economy and the
sophistication of local competition
•
Macroeconomic competitiveness sets the potential for high productivity, but is not sufficient
•
Endowments create a foundation for prosperity, but true prosperity is created by productivity in the use
of endowments
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson
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Copyright 2012 © Professor Michael E. Porter
Saudi Arabia’s Progress on Competitiveness
• Competitiveness has become central to Saudi Arabia’s economic policy agenda
• Substantial reforms have been implemented in areas like infrastructure,
market opening, legal reform, business regulation, education, and financial
markets
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson
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Copyright 2012 © Professor Michael E. Porter
World Bank Doing Business Indicators
Saudi Arabian Doing Business Ranking, 2005 - 2012
15
13
10
12
2009
2010
2011
2012
23
38
38
2006
2007
118
2005
2008
Note: Rankings include total of 183 countries.
Source: World Bank, SAGIA
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson
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Copyright 2012 © Professor Michael E. Porter
Saudi Arabia’s Progress on Competitiveness
• Competitiveness has become central to Saudi Arabia’s economic policy agenda
• Substantial reforms have been implemented in areas like infrastructure,
market opening, legal reform, business regulation, education, and financial
markets
• Saudi Arabia has established a base of home-grown private sector
businesses, together with state-controlled companies and multinationals that
are operating in the country
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson
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Copyright 2012 © Professor Michael E. Porter
Saudi Arabia’s Progress on Competitiveness
• Competitiveness has become central to Saudi Arabia’s economic policy agenda
• Substantial reforms have been implemented in areas like infrastructure,
market opening, legal reform, business regulation, education, and financial
markets
• Saudi Arabia has established a base of home-grown private sector
businesses, together with state-controlled companies and multinationals that
are operating in the country
• However, boosting prosperity growth and job creation remain critical priorities
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson
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Copyright 2012 © Professor Michael E. Porter
Prosperity Performance
Selected Middle Income Countries
PPP-adjusted GDP per
Capita, 2010 ($USD)
$30,000
UAE (-0.9%, 56,500)
$28,000
Cyprus
New Zealand
Slovenia
Greece
$26,000
Czech Republic
Portugal
$24,000
South Korea
Average: 5.4%
Bahrain
Oman
$22,000
Saudi Arabia
Slovakia
$20,000
Poland
Hungary
$18,000
Croatia
Mexico
$16,000
Lithuania
Panama
Argentina
Russia
Latvia
Chile
Malaysia
$14,000
Trinidad & Tobago
Turkey
Venezuela
$12,000
Brazil
Costa Rica
$10,000
0.0%
2.0%
Source: EIU (2011), author’s calculations
Average: $18,163
Estonia
Uruguay
Lebanon
Bulgaria
Romania
Dominican Republic
South Africa
4.0%
6.0%
8.0%
Belarus
Kazakhstan
10.0%
12.0%
Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2000 - 2010
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson
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Copyright 2012 © Professor Michael E. Porter
Saudi Arabia’s Share of World Exports by Cluster, 2009
World Market Share
> 5.0%
1.27% - 5.0%
0.2% - 1.26%
Fishing &
Fishing
Products
Processed
Food
Hospitality
& Tourism
Agricultural
Products
Transportation
& Logistics
Distribution
Services
Jewelry &
Precious
Metals
Business
Services
Financial
Services
Entertainment
Aerospace
Vehicles &
Information
Defense
Tech.
Building
Fixtures,
Equipment &
Services
Motor Driven
Products
Heavy
Machinery
Production
Technology
Aerospace Mining & Metal
Engines Manufacturing
Plastics
Leather &
Related
Products
Note: Saudi Arabia’s overall share of world exports is 1.268%.
Forest
Products
Tobacco
Oil &
Gas
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson
Construction
Materials
Power
Generation
ceuticals
Apparel
Furniture
Heavy
Construction
Services
Lightning &
Electrical
Equipment
Analytical
Education &
Instruments
Knowledge
Medical
Creation
Devices
Communications
Publishing
Services
& Printing
Biopharma-
Chemical
Products
Footwear
Textiles
Prefabricated
Enclosures
Sporting
& Recreation
Goods
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Automotive
Marine
Equipment
Copyright 2011 © Professor Michael E. Porter
Saudi Arabia’s Progress on Competitiveness
• Competitiveness has become central to Saudi Arabia’s economic policy agenda
• Substantial reforms have been implemented in areas like infrastructure,
market opening, legal reform, business regulation, education, and financial
markets
• Saudi Arabia has established a base of home-grown private sector
businesses, together with state-controlled companies and multinationals that
are operating in the country
• However, boosting prosperity growth and job creation remain critical priorities
• Stimulating entrepreneurship is central to reap the full benefits of these
competitiveness reforms
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson
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Copyright 2012 © Professor Michael E. Porter
Competitiveness and Entrepreneurship
•
Creates the necessary
context for entrepreneurship
to emerge and prosper
Competitiveness
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson
Entrepreneurship
•
Drives competitiveness
upgrading
•
Builds out clusters
•
Enables economic
diversification
•
Fundamental to large scale
job growth
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Copyright 2012 © Professor Michael E. Porter
What Drives Entrepreneurship?
Measures to Upgrade the Business Environment for Entrepreneurs
Context for
Firm Strategy
and Rivalry
• Availability of funding
Factor
(Input)
Conditions
•
•
•
•
Entrepreneurship education
Mentorship programs
Entrepreneur networks
Policies to ease new
business formation
− Ease of incorporation
− Ease of doing business
− Corporate and bankruptcy laws
− Access to lending
− Angel funding
− Organized risk capital
• Strong incentives
− Low taxes on capital gains
− Strong IP protection
• Public recognition of
entrepreneurial success
Demand
Conditions
• Government and private
sector procurement
policies open to SMEs
Related and
Supporting
Industries
• Availability of support
services such as legal and
business services
• A cluster-based
development model
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson
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Copyright 2012 © Professor Michael E. Porter
Entrepreneurship in Saudi Arabia
The Opportunity
• Stable economy with a prudent financial structure
• Large, youthful and growing population
• Growing markets with many unserved niches
• No income taxes
• Emerging venture capital industry
• Large and sustained government investments in the economy
• Increasing foreign interest in investing in the Middle East
• Opportunity to serve the entire region from a base in the largest economy
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson
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Copyright 2012 © Professor Michael E. Porter
Entrepreneurship in Saudi Arabia
Current Situation
• Competitiveness upgrading in the Saudi economy has enabled
entrepreneurship to take root
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson
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Copyright 2012 © Professor Michael E. Porter
Entrepreneurship Profile in the GCC Region
Findings from the Saudi Fast Growth 100 and the Arabia 500
• Academic background often in engineering or business
• Worked 3-5 years for a global firm before launching their enterprise at 30,
often in a related industry
• Creatively configured products and services that are tailored to local
market conditions
• World class operating practices akin to those of multinationals
• Persistence and agility in order to compete with large incumbents
• International networks of business partners and associates
Source: Arabia 500
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson
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Copyright 2012 © Professor Michael E. Porter
Entrepreneurship in Saudi Arabia
Current Situation
• Competitiveness upgrading in the Saudi economy has enabled
entrepreneurship to take root
• Entrepreneurs are making an important contribution to diversifying the
economy (services, non-resource industries)
• Entrepreneurs are creating a mechanism for Saudi Nationals to enter the
private sector
• However, further efforts to improve the context for entrepreneurs are critical
in order for entrepreneurship to reach its full impact on the Saudi economy
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson
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Copyright 2012 © Professor Michael E. Porter
Current Efforts to Support Entrepreneurship in
Saudi Arabia
Awareness
Financing
•
Saudi Industrial
Development Fund –
Kafalah Program
•
Centennial Fund
•
Bab Rizq Jameel
•
Incubation
•
Saudi Fast Growth 100
•
•
Prince Salman bin
Abdulaziz - Young
Entrepreneur Awards
Riyadh Technology
Incubation Center
•
Riyadh Techno Valley
•
Dhahran Techno Valley
•
Injaz-Saudi Program
•
•
MIT Arab Business Plan
Competition
National
Entrepreneurship
Institute
Many of these efforts are relatively new, and bringing them to scale will be critical for
entrepreneurship in Saudi Arabia
Source: “SME and Entrepreneurship Support Services in Saudi Arabia Stakeholder Mapping” report by SAGIA.
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson
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Copyright 2012 © Professor Michael E. Porter
Challenges to Entrepreneurship in Saudi Arabia and
Other Emerging Economies
• Limited, but growing entrepreneurial culture
• Lack of public visibility and media coverage of emerging companies
• Risk aversion and fear of failure
• Limited skills in the Saudi workforce
• Still cumbersome government regulation and red tape
• Limited progress on cluster development, and few cluster collaboration
organizations supporting SMEs
• Lack of supplier development programs at large companies
• Risk of “crowding out” by government-linked companies and large MNCs
Source: Arabia 500
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson
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Copyright 2012 © Professor Michael E. Porter
Entrepreneurship and Saudi Competitiveness
Conclusions
• Entrepreneurs are crucial in order to translate Saudi Arabian progress on
competitiveness into broad-based economic growth and employment
• Saudi entrepreneurs have begun to establish themselves as an integral
part of the Saudi economy
• The future success of Saudi entrepreneurs will depend on sustained
efforts to upgrade the Saudi business environment to meet
entrepreneurs’ specific needs
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson
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Copyright 2012 © Professor Michael E. Porter