Can Japan Compete?
Revisited
Professor Michael E. Porter
Harvard Business School
Porter Prize Conference
Tokyo, Japan
December 5th, 2013
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), “Creating Shared Value” (Harvard Business Review, Jan 2011), the Social Progress Index Report (Social Progress Imperative)
and ongoing related research. 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), FSG (www.fsg.org) and the Social Progress Imperative (www.socialprogressimperative.org).
Can Japan Compete?
• What is the state of Japanese
competitiveness in 2013? How
has Japan progressed since
2000?
• What is Japan’s strategic
agenda for 2014 and beyond?
• Is Abenomics sufficient?
20131205—Porter Prize Japan Competitiveness Presentation—FINAL
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Copyright 2013 © Professor Michael E. Porter
Can Japan Compete?
1. Japan’s Economic Performance
2. Competitiveness and Economic Growth: The New Learning
3.
The Strategic Agenda for Japan in 2014
20131205—Porter Prize Japan Competitiveness Presentation—FINAL
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Copyright 2013 © Professor Michael E. Porter
Japan’s Economic Performance
• Overall economic performance has been disappointing, reflecting a poor
macroeconomic environment and continuing microeconomic weaknesses
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Copyright 2013 © Professor Michael E. Porter
Prosperity Performance
OECD Countries
PPP-Adjusted GDP per
Capita, 2012 ($USD)
$70,000
OECD Average: 3.49%
Norway
$60,000
Switzerland
United States
$50,000
$40,000
Iceland
Italy
$30,000
Canada Ireland Austria
Sweden
Netherlands
Australia
Denmark
Germany
Japan Belgium
Finland
France
Spain
United Kingdom
Israel
New Zealand
Slovenia
OECD Average: $34,439
South Korea
Czech Republic
Portugal
Greece
$20,000
Poland
Hungary
Slovakia
Estonia
Chile
Mexico
Turkey
$10,000
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Growth in Real GDP per Capita (PPP-adjusted), CAGR, 2000-2012
7.0%
8.0%
Note: Luxembourg Excluded
Source: EIU (2013), authors calculations
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Copyright 2013 © Professor Michael E. Porter
Japan’s Economic Performance
• Overall economic performance has been disappointing, reflecting a poor
macroeconomic environment and continuing microeconomic weaknesses
• While growth in productivity of existing workers remains in line with many
advanced OECD peers, Japan has suffered from declining workforce
participation
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Copyright 2013 © Professor Michael E. Porter
Japan’s Economic Performance
• Overall economic performance has been disappointing, reflecting a poor
macroeconomic environment and continuing microeconomic weaknesses
• While growth in productivity of existing workers remains in line with many
advanced OECD peers, Japan has suffered from declining workforce
participation
• Japan’s share of world export share has continued to gradually fall, in line with
advanced OECD countries besides Germany
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Copyright 2013 © Professor Michael E. Porter
Share of World Exports
Share of World
Exports of Goods
and Services
Selected Countries, 1980 - 2012
16.0%
14.0%
12.0%
United States
10.0%
Germany
8.0%
Japan
China
6.0%
United Kingdom
4.0%
Korea
2.0%
India
0.0%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Source: UNCTADstat (2013)
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Copyright 2013 © Professor Michael E. Porter
Japan’s Economic Performance
• Overall economic performance has been disappointing, reflecting a poor
macroeconomic environment and continuing microeconomic weaknesses
• While growth in productivity of existing workers remains in line with many
advanced OECD peers, Japan has suffered from declining workforce
participation
• Japan’s share of world export share has continued to gradually fall, in line with
advanced OECD countries besides Germany
• Imports into the Japanese economy have grown, reflecting gradual opening
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Copyright 2013 © Professor Michael E. Porter
Import Performance
OECD Countries
Imports of Goods and
Services (% of GDP),
2012
100.0%
OECD Average: 5.38%
90.0%
Slovakia
Estonia
Ireland
Hungary
Belgium
80.0%
Netherlands
Czech Republic
Slovenia
70.0%
60.0%
South Korea
Austria
Denmark
50.0%
OECD Average: 47.36%
Switzerland
40.0%
Portugal
30.0%
Greece
Norway
Germany
Sweden
Poland
Finland
United Kingdom
Spain
Canada
Iceland
Israel
France
Mexico
Italy Chile
Turkey
New Zealand
20.0%
Australia
United States
Japan
10.0%
0.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
Change in Imports of Goods and Services (% of GDP), 2000-2012
Note: Luxembourg omitted
Source: EIU (2013), authors calculations
20131205—Porter Prize Japan Competitiveness Presentation—FINAL
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Copyright 2013 © Professor Michael E. Porter
Japan’s Economic Performance
• Overall economic performance has been disappointing, reflecting a poor
macroeconomic environment and continuing microeconomic weaknesses
• While growth in productivity of existing workers remains in line with many
advanced OECD peers, Japan has suffered from declining workforce
participation
• Japan’s share of world export share has continued to gradually fall, in line with
advanced OECD countries besides Germany
• Imports into the Japanese economy have grown, reflecting gradual opening
• FDI inflows into the Japanese economy remain the lowest of any OECD country.
Outbound FDI has grown but lags all other advanced economies
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Copyright 2013 © Professor Michael E. Porter
Inbound Foreign Investment Performance
Stocks and Flows, OECD Countries
Inward FDI Stocks as %
of GDP, Average 20002011
80.0%
Belgium
(95.21%, 139.07%)
Netherlands
OECD Average: 22.71%
Estonia
70.0%
Ireland
(45.26%, 110.22%)
Switzerland
Chile
Hungary
60.0%
Czech Republic
Sweden
Slovakia
New Zealand
50.0%
OECD Average: 48.01%
Denmark
Iceland
Portugal
40.0%
Australia
Austria
Norway
Slovenia
30.0%
United Kingdom
Spain
France Canada
Finland Poland
Mexico
Israel
United States
20.0%
Germany
Turkey
Greece
10.0%
Korea
Italy
Japan
0.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
FDI Inflows as % of Gross Fixed Capital Formation, Average 2000-2011
Note: Luxembourg omitted
Source: UNCTAD, World Investment Report (2012)
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Copyright 2013 © Professor Michael E. Porter
Japan’s Economic Performance
• Overall economic performance has been disappointing, reflecting a poor
macroeconomic environment and continuing microeconomic weaknesses
• While growth in productivity of existing workers remains in line with many
advanced OECD peers, Japan has suffered from declining workforce
participation
• Japan’s share of world export share has continued to gradually fall, in line with
advanced OECD countries besides Germany
• Imports into the Japanese economy have grown, reflecting gradual opening
• FDI inflows into the Japanese economy remain the lowest of any OECD country.
Outbound FDI has grown but lags all other advanced economies
• Japan continues to be among the top innovators in the world, but some other
countries are more rapidly increasing R&D spending
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Copyright 2013 © Professor Michael E. Porter
Innovative Output
Selected Countries
Average U.S. patents per 1
million population, 2010-2012
400
Taiwan
Japan
350
United States
300
Israel
250
South Korea
Switzerland
200
Sweden
Finland
Germany
Canada
150
Denmark
Singapore
Netherlands
100
Austria
Norway
Australia
France
Belgium
Ireland
United Kingdom
50
Brazil
0
0%
Mexico
China
(35.0%)
New Zealand
Italy
South Africa
Hong Kong
5%
Czech Republic
Malaysia
Spain
Russia
10%
Saudi Arabia
15%
CAGR of US-registered patents, 2000-2012
Source: USPTO (2010), Groningen Growth and Development Centre, Total Economy Database (2010)
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India
20%
25%
13,000 patents =
Copyright 2013 © Professor Michael E. Porter
Can Japan Compete?
1. Japan’s Economic Performance
2. Competitiveness and Economic Growth: The New Learning
3.
The Strategic Agenda for Japan in 2014
20131205—Porter Prize Japan Competitiveness Presentation—FINAL
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Copyright 2013 © Professor Michael E. Porter
Competitiveness and Economic Growth
A nation or region is competitive to the extent that firms operating there are able
to compete successfully in the regional and global economy while maintaining
or improving wages and living standards for the average citizen
• Competitiveness depends on the long-run productivity of a location as a
place to do business
- The productivity of existing firms and workers
- The ability to achieve high participation of citizens in the workforce
• Competitiveness is not:
- Low wages
- A weak currency
- Jobs per se
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Copyright 2013 © Professor Michael E. Porter
What Determines Competitiveness?
Endowments
•
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
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Copyright 2013 © Professor Michael E. Porter
What Determines Competitiveness?
Macroeconomic Competitiveness
Human Development
and Effective
Political Institutions
Sound Monetary
and Fiscal Policies
Endowments
•
Macroeconomic competitiveness sets the economy-wide context for productivity to emerge, but is not
sufficient to ensure productivity
• 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
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Copyright 2013 © Professor Michael E. Porter
What Determines Competitiveness?
Microeconomic Competitiveness
Sophistication
of Company
Operations and
Strategy
State of Cluster
Development
Quality of the
Business
Environment
Macroeconomic Competitiveness
Human Development
and Effective
Political Institutions
Sound Monetary
and Fiscal Policies
Endowments
•
Productivity ultimately depends on improving the microeconomic capability of the economy and the
sophistication of local competition revealed at the level of firms, clusters, and regions
• Macroeconomic competitiveness sets the economy-wide context for productivity to emerge, but is not
sufficient to ensure productivity
• 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
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Copyright 2013 © Professor Michael E. Porter
Improving the Quality of the Business Environment
Context for
Firm Strategy
and Rivalry
• Local rules and incentives that
encourage investment and productivity
Factor
(Input)
Conditions
– e.g. incentives for capital investments,
IP protection
• Sound corporate governance
Demand
Conditions
• Open and vigorous local competition
• Improving access to high quality
business inputs
–
–
–
–
Qualified human resources
Capital availability
Physical infrastructure
Scientific and technological
infrastructure
– Efficient regulatory system
− Openness to foreign competition
− Strict competition laws
• Sophisticated and demanding local
needs
Related and
Supporting
Industries
– e.g., Strict quality, safety, and
environmental standards
• Availability and quality 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
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Copyright 2013 © Professor Michael E. Porter
Developing Clusters: Tourism in Cairns, Australia
Public Relations &
Market Research
Services
Travel Agents
Tour Operators
Food
Suppliers
Attractions and
Activities
Hotels
Government Agencies
e.g., Australian Tourism
Commission,
Great Barrier Reef Authority
Local
Transportation
e.g., theme parks,
casinos, sports
Souvenirs,
Duty Free
Property
Services
Maintenance
Services
Local Retail,
Health Care, and
Other Services
Airlines,
Cruise Ships
Restaurants
Banks,
Foreign
Exchange
Educational Institutions
Industry Groups
e.g., James Cook University,
Cairns College of TAFE
e.g., Queensland Tourism
Industry Council
Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden
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Copyright 2013 © Professor Michael E. Porter
Prosperity of Japanese Prefectures
$45,000
Japan Real Growth Rate of GDP
per Capita: 2.75%
Tokyo ($ 62,195, 2.14 %)
Gross Domestic Product per Capita, 2010
(Current $US at PPP)
$40,000
Shiga
Aichi
Shizuoka
Osaka
$35,000
Japan GDP per Capita:
$34,758
Ishikawa
Hokkaido
Gumma
Okayama Niigata
Kagawa
Nagano
Gifu
Yamaguchi
Yamanashi
Fukuoka
Tokushima
Wakayama
Kyoto
Ehime
Akita
Hyogo Shimane
Iwate
Chiba
Mie
Ibaraki
Oita
Fukushima
Kanagawa
Tottori
Tochigi
Hiroshima
Miyagi
$30,000
Fukui
Toyama
Saga
Yamagata
Kumamoto
Kagoshima
Miyazaki
Nagasaki
Aomori
Kochi
$25,000
Saitama
Okinawa
Nara
$20,000
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
Real Growth Rate of GDP per capita, 2000-2010
Source: OECD iLibrary (2013)
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Copyright 2013 © Professor Michael E. Porter
The Role of Regions in Economic Development
• Many essential levers of competitiveness reside at the regional level
• Regions specialize in different sets of clusters
• Regions are a critical unit in competitiveness
• Each region needs its own distinctive strategy and action agenda
– Business environment improvement
– Cluster upgrading
– Improving institutional effectiveness
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Copyright 2013 © Professor Michael E. Porter
Geographic Influences on Competitiveness
Neighboring Countries
Nation
Regions and Cities
• Economic coordination and integration with neighboring countries is a major force of
productivity and competitiveness
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Copyright 2013 © Professor Michael E. Porter
Japan’s Competitiveness Profile, 2001
ISC Competitiveness Model
Country Competitiveness
23
Macroeconomic
Competitiveness
Microeconomic
Competitiveness
28
17
Political Institutions
32
Macroeconomic
Policy
National Business
Environment
Company Operations
and Strategy
66
22
9
Rule of Law
22
Japan’s GDP per capita rank is 18th
versus 71 countries
Human
Development
15
Significant
disadvantage
Moderate
disadvantage
Neutral
Moderate
advantage
Significant
advantage
Note:
Rank versus 71 countries; *Color coding based on comparison relative to income;
Source:
Institute for Strategy and Competitiveness, Harvard University (2012), based in part on survey data from the World Economic Forum; analysis prepared based on research findings by Scott Stern, Mercedes
Delgado, and Christian Ketels.
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Copyright 2013 © Professor Michael E. Porter
Can Japan Compete?
The Corporate Agenda in 2001
1. Shift the goal from growth to profitability
2. Create distinctive, long term strategies
3. Expand the focus of operational effectiveness to IT
4. Understand the role of industry structure
5. Reduce unrelated diversification
6. Update the Japanese organizational and governance model
7. Develop a stronger role for the private sector in economic
development
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Copyright 2013 © Professor Michael E. Porter
Can Japan Compete?
Government Agenda in 2001
1. Open up domestic competition and reduce government
intervention
2. Open trade and foreign investment
3. Modernize archaic and inefficient domestic sectors
4. Build a world class university system
5. Create new models of innovation and entrepreneurship
6. Encourage decentralization, regional specialization, and
cluster development
7. Create stronger corporate accountability
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Copyright 2013 © Professor Michael E. Porter
Japan’s Competitiveness Profile, 2012
ISC Competitiveness Model
Country Competitiveness
18
Macroeconomic
Competitiveness
Microeconomic
Competitiveness
24
14
Political Institutions
22
Macroeconomic
Policy
National Business
Environment
Company Operations
and Strategy
68
16
4
Rule of Law
17
Japan’s GDP per capita rank is 18th
versus 71 countries
Human
Development
14
Significant
disadvantage
Moderate
disadvantage
Neutral
Moderate
advantage
Significant
advantage
Note:
Rank versus 71 countries; *Color coding based on comparison relative to income;
Source:
Institute for Strategy and Competitiveness, Harvard University (2012), based in part on survey data from the World Economic Forum; analysis prepared based on research findings by Scott Stern, Mercedes
Delgado, and Christian Ketels.
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Copyright 2013 © Professor Michael E. Porter
Company Progress since 2001
1.
Shift the goal from growth to profitability
– More businesses are being divested due to inadequate profitability, but Japanese ROIC remains low
2.
Create distinctive, long term strategies
– The Porter Prize has recognized 41 companies with distinctive strategies since 2001
– Many companies have become more focused
3.
Expand the focus of operational effectiveness to IT
– The utilization of IT has increased substantially, improving productivity
4.
Understand the role of industry structure
– Industry attractiveness has become a larger factor in corporate choices
5.
Reduce unrelated diversification
– Many corporate portfolios have been pruned
6.
Update the Japanese organizational and governance model
– The number of executive board members has been reduced
– The number of companies with outside board members have substantially increased
– Cross shareholding has fallen
7.
Develop a stronger role for the private sector in economic development
– Business leaders are becoming more involved in national and regional economic development
– Shared value has become a major new thrust in Japanese corporations
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Copyright 2013 © Professor Michael E. Porter
Government Progress Since 2001
1.
Open up domestic competition and reduce government intervention
–
–
–
2.
Stricter anti-trust laws and enforcement has brought Japan closer to world standards
Government still prone to intervention and government solutions (e.g. electronics)
Targeting persists in “growth industries”
Open trade and foreign investment
–
–
3.
FTAs signed with many nations, with the TPP being discussed
FDI restrictions have been partially reduced, but barriers remain
Modernize archaic and inefficient domestic sectors
–
–
–
4.
Rules governing construction improved
Protection for small scale retailing reduced
Agriculture largely unchanged
Build a world class university system
–
–
5.
Some steps have been taken to raise university standards and accountability
Archaic rules still disadvantage students studying outside Japan
Create new models of innovation and entrepreneurship
–
–
–
6.
Rules for starting businesses have improved, though still not world class
IP protection strengthened
Access to public listing by newer companies has improved
Encourage decentralization, regional specialization, and cluster development
–
–
7.
Cluster initiatives have proliferated, but progress remains uneven
Only modest delegation of central government powers has occurred
Create stronger corporate accountability
–
–
At least one independent board member is recommended for TSE-listed companies
Few companies still have effective corporate governance
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Copyright 2013 © Professor Michael E. Porter
Trajectory of the Japanese Business Environment
Rank in 2012
Change in
Rank
16
+7
Supporting and Related
Industries and Clusters
4
0
Logistical Infrastructure
12
-4
Demand Conditions
16
+3
Capital Market Infrastructure
20
+7
Communications Infrastructure
21
0
Factor Conditions
21
+1
Context for Strategy and Rivalry
22
+7
Innovation Infrastructure
23
-2
Regulatory Infrastructure
38
-2
Overall Business Environment
Rank versus a
consistent
sample of 71
countries
Note:
Rank versus 71 countries
Source:
Institute for Strategy and Competitiveness, Harvard University (2012), based in part on survey data from the World Economic Forum; analysis prepared based on research findings by Scott Stern, Mercedes
Delgado, and Christian Ketels.
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Copyright 2013 © Professor Michael E. Porter
Microeconomic Competitiveness Indicators
Ease of Doing Business Rankings – Japan
Ranking, 2013
(vs. 185 countries)
Favorable
Unfavorable
140
120
100
80
60
40
Japan’s GDP per
capita rank: 21
20
0
Ease of
Doing
Business
Rank
Resolving
Insolvency
Protecting
Investors
Trading
Across
Borders
Getting Credit
Getting
Electricity
Enforcing
Contracts
Registering
Property
Dealing with
Construction
Permits
Starting a
business
Paying Taxes
Source: World Bank Report, Doing Business (2013)
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Copyright 2013 © Professor Michael E. Porter
Can Japan Compete?
1. Japan’s Economic Performance
2. Competitiveness and Economic Growth: The New Learning
3.
The Strategic Agenda for Japan in 2014
20131205—Porter Prize Japan Competitiveness Presentation—FINAL
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Copyright 2013 © Professor Michael E. Porter
Japan’s Strategy under Prime Minister Abe
The “Three Arrows” of Abenomics
Monetary Expansion
20131205—Porter Prize Japan Competitiveness Presentation—FINAL
Temporary Fiscal
Expansion, then
Consolidation
34
Structural Reforms
Copyright 2013 © Professor Michael E. Porter
Japan’s Strategy under Prime Minister Abe
The “Third Arrow”: Structural Reforms
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Copyright 2013 © Professor Michael E. Porter
The “Three Arrows” of Abenomics: Progress to Date
Monetary Expansion
Temporary Fiscal
Expansion, then
Consolidation
• Fully implemented
• Expansion implemented
• Promising Results
• Consolidation beginning
• Success unclear
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Structural Reforms
• An extensive list of
suggested actions, few
steps taken so far
Copyright 2013 © Professor Michael E. Porter
The Japanese Corporate Agenda for 2014
1. Accelerate the shift to strategic thinking
2. Accelerate globalization, making greater use of M&A
3. Encourage fast track leadership development and mid career
recruiting to complement internal promotion
– Mobility of talent will dramatically improve Japanese company
performance
4. Simplify and streamline decision making while continuing to
improve accountability and governance
5. Evolve executive compensation practices to incentivize risk
taking
6.
Embrace shared value as the guiding principle for Japanese
business
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Copyright 2013 © Professor Michael E. Porter
The National Agenda in 2014
1. Continue opening domestic and international competition
– Eliminate remaining barriers to FDI and imports
– Reduce government subsidies and intervention in companies
2.
Lower the unnecessary high costs of doing business in Japan
– Regulation and bureaucracy is Japan’s greatest weakness
3. Deregulate the key Japanese sectors to unlock growth, productivity and innovation
– Agriculture
– Health Care
4. Continue decentralizing resources and responsibility to Japanese prefectures
and metropolitan regions
– Let regions compete to develop clusters, attract investment and upgrade their business
environment
5. Restructure Japan's fiscal structure
– Lower the corporate tax rate while eliminating tax breaks
– Reduce capital gains taxation
– Moderate taxes on earned income
– Increase consumption based and non-renewable energy use taxes
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Copyright 2013 © Professor Michael E. Porter
The National Agenda in 2014
6. Set a pragmatic long term energy strategy
– The cost of energy is a major competitiveness issue
– Transitional solutions and carbon taxes will be needed to bridge the present and the future
– Energy efficiency must become a national priority
7. Connect Japan to the rest of the world
– Raise language skills
– Support international education
– Welcome skilled immigration
– Embrace the internationalization of knowledge
– Encourage deeper globalization by Japanese companies
– Move from politics to building economic partnership with other Asian countries
8. Tap the talent and potential of Japanese citizens and enrich the nation’s
human resources
– Embrace and enable womens’ participation in the workforce
– Open up labor mobility
– Welcome skilled expatriates from abroad
– Encourage and support Japanese students studying abroad
– Raise the standards in Japanese universities and business schools
9. Deepen economic integration of Japan in the Asian region
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Copyright 2013 © Professor Michael E. Porter