Achieving Economic and Social Progress
in Latin America: The New Learning
Professor Michael E. Porter
Harvard Business School
VI Ministerial Forum for Development
United Nations - New York
July 11, 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), 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
The Dual Challenges of Development
Social
Development
Economic
Development
• There is a powerful connection between economic and social development
• Improving competitiveness requires improving the economic and social
context simultaneously
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Copyright 2013 © Professor Michael E. Porter
Economic Development depends on Competitiveness
What is Competitiveness?
A country or state is competitive to the extent that firms operating there are able
to compete successfully in the regional and global economy while supporting
high and rising wages and living standards for the average citizen
• Competitiveness depends on the long-run productivity of a location as a
place to do business
- Productivity of existing firms and workers
- Ability to achieve high participation of working age 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 country size, 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 country size, 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?
Human Development
and Effective
Political Institutions
Macroeconomic Competitiveness
Sound Monetary
and Fiscal Policies
Human Development
and Effective
Political Institutions
Endowments
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•
Human Development:
Basic education, health
care, equal opportunity
•
Rule of Law:
Property rights, personal
security, and due process
•
Political Institutions:
Stable and effective
political and governmental
organizations and
processes
Copyright 2013 © Professor Michael E. Porter
What Determines Competitiveness?
Microeconomic Competitiveness
Quality of the
Business
Environment
State of Cluster
Development
Sophistication
of Company
Operations and
Strategy
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 country size, 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
Peru’s National Business Environment, 2012
Context for
Firm Strategy
and Rivalry
Factor
(Input)
Conditions
+ Abundant resources: mineral,
agricultural, fishing, and cultural
+ Advantageous location
+ Improving administrative infrastructure
+ Simplified customs procedures
± Sound banking system, but high interest
spreads
± Improving financial markets, but limited
venture capital availability
– Poor physical infrastructure
– Low skill levels in the labor force,
mismatch with demand
– Weak university-industry research
collaboration
– Few high-quality research and scientific
institutions
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+ Openness to foreign investment,
trade, capital flows
+ Improvements in investor protections
± Efforts to strengthen competition policy
Demand
– Rigidity of employment
Conditions
– Difficulty in business formation
– Low intensity of local competition
– High Informality of the economy
+ Improving consumer protection
regulation
± Improving sophistication of local buyers
– Weak environmental standards
Related and
enforcement
Supporting
Industries
– Limited local suppliers and
supporting industries
– Shallow clusters
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Copyright 2013 © Professor Michael E. Porter
Geographic Influences on Competitiveness
Nation
Regions and Cities
• Regions are the most important economic unit for competitiveness in larger countries,
especially countries beyond subsistence development
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Copyright 2013 © Professor Michael E. Porter
Prosperity of Mexican States
$180,000
Campeche
Mexico Real Growth
Rate of GDP per Capita:
1.36%
(-4.9%, $333,700)
$160,000
Distrito Federal
Nuevo Leon
Gross Domestic Product per Capita , 2010
(in constant 2003 Mexican Pesos)
$140,000
$120,000
Tabasco
Coahuila
$100,000
Baja California Sur
Querétaro
Aguascalientes
Sonora
Quintana Roo
Tamaulipas
Colima
Chihuahua
$80,000
Jalisco
Baja California
Durango
Guanajuato
Yucatán
Morelos
$60,000
Mexico GDP per Capita:
$77,212
Sinaloa
San Luis Potosí
México
Puebla
Michoacán
Nayarit
Veracruz
Zacatecas
Hidalgo
Tlaxcala
Chiapas
$40,000
Guerrero
Oaxaca
$20,000
$0
-1.5%
-0.5%
0.5%
1.5%
2.5%
3.5%
4.5%
Real Growth Rate of GDP per capita, 2003-2010
Source:
INEGI.Competitiveness
Sistema deSVCuentas
de México.
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The Role of Regions in Economic Development
• Many essential levers of competitiveness reside at the regional level
• Regions specialize in different sets of clusters
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Copyright 2013 © Professor Michael E. Porter
Traded Cluster Composition of the Puebla Economy
16.0%
Overall change in the Puebla Share of
Mexican Traded Employment: +0.09%
14.0%
Construction
Materials
Textiles
Puebla’s national employment share, 2008
Apparel
12.0%
Automotive
10.0%
Employment
2003-2008
Added Jobs
8.0%
Building Fixtures,
Equipment and Services
Lost Jobs
Processed
Food
Furniture
6.0%
Education and
Knowledge Creation
4.0%
Leather and
Related Products
Forest Products
Puebla Overall Share of Mexican
Traded Employment: 4.20%
Distribution Services
Heavy Machinery
2.0%
0.0%
-2.0%
Information
Technology
Chemical
Products
-1.0%
0.0%
1.0%
Change in Puebla’s share of National Employment, 2003 to 2008
2.0%
3.0%
Employees 5,000 =
Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Contributions by Prof. Niels Ketelhohn.
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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 government effectiveness
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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
Developing Clusters
Peruvian Asparagus
Inputs
Related Clusters
Fertilizer
Financial Services
Seed/Seedlings
Institutions for
collaboration
•
•
•
•
Asparagus Industry Group (IPEH)
Peru Export Association (ADEX)
Agroexporters Guild (AGAP)
SME Promotion (PROMPEX)
Gastronomy
Transportation/Logistics
Pesticides
Asparagus Growers
Ports (Salaverry)
Irrigation Systems
Green Asparagus
White Asparagus
Fresh Asparagus
Processed/Frozen
Asparagus
Cold Chain
Transportation
(Frío Aéreo)
Machinery
Railways
Processing
Equipment
Airports
Packing Material
Government
Institutions
Other Equipment
• Export Promotion (PROMPERU)
• Agriculture Sanitation (SENASA)
• Universities (Trujillo, UNAM,
UPN)
• Technical Standards (ANTCS)
Imports/Weaknesses
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Source:
Interviews with industry representatives, team analysis
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Customs
Agencies
Domestic Production/Strengths
Copyright 2013 © Professor Michael E. Porter
Organize Public Policy around Clusters
Business Attraction
Education and
Workforce Training
Export Promotion
Market Information
and Disclosure
Clusters
Specialized Physical
Infrastructure
Natural Resource Protection
Science and Technology
Infrastructure
(e.g., centers, university
departments, technology
transfer)
Quality and environmental
standards
• Clusters provide a framework for organizing the implementation of many
public policies and public investments directed at economic development
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Copyright 2013 © Professor Michael E. Porter
Economic Development and Social Progress
• Economic progress has a positive impact on social progress, but
rising GDP per Capita does not guarantee social progress
• We must measure social progress directly in order to understand
performance and inform improvement
• The Social Progress Index is a new tool to do so
− Holistic framework
− Outcomes (not inputs)
− Separate from economic
• By separating social and economic progress, we can better
understand performance and how social and economic
performance are linked
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Copyright 2013 © Professor Michael E. Porter
What is Social Progress?
Social progress is the capacity of a society to meet the basic
human needs of its citizens, establish the building blocks
that allow citizens and communities to enhance and sustain
the quality of their lives, and create the conditions for all
individuals to reach their full potential.
www.socialprogressimperative.org
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Copyright 2013 © Professor Michael E. Porter
The Social Progress Index Framework
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Copyright 2013 © Professor Michael E. Porter
Costa Rica
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
Comparing country Performance: Costa Rica vs. South
Africa
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Copyright 2013 © Professor Michael E. Porter
The Role of Business in Social and Economic Development
Evolving Approaches
Philanthropy
• Donations to worthy
social causes
• Volunteering
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Copyright 2013 © Professor Michael E. Porter
The Role of Business in Social and Economic Development
Evolving Approaches
Philanthropy
Corporate Social
Responsibility
(CSR)
• Donations to worthy
social causes
• Compliance with
community standards
• Volunteering
• Good corporate
citizenship
• “Sustainability”
• Mitigate risk and
harm
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Copyright 2013 © Professor Michael E. Porter
The Role of Business in Social and Economic Development
Evolving Approaches
Corporate Social
Responsibility
(CSR)
Creating Shared
Value
(CSV)
• Donations to worthy
social causes
• Compliance with
community standards
• Volunteering
• Good corporate
citizenship
• Integrating social
needs and challenges
into economic value
creation itself
Philanthropy
• “Sustainability”
• Mitigate risk and
harm
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Copyright 2013 © Professor Michael E. Porter
What is Shared Value?
Creating Shared Value:
Addressing a social issue with a business model
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Copyright 2013 © Professor Michael E. Porter
Social Needs and Economic Value Creation
Environmental
Improvement
Community
Economic
Development
Energy Use
Water Use
Company
Productivity
Affordable
Housing
Supplier
Access and
Viability
Worker
Skills
Worker
Safety
Health
• Social deficits create economic costs
• “Externalities” affect internal company productivity
• Social needs represent the largest market opportunities
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Copyright 2013 © Professor Michael E. Porter
Levels of Shared Value
I. Meeting social needs through products and underserved
customers
II. Redefining productivity in the value chain
III. Improving the local and regional business environment
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Copyright 2013 © Professor Michael E. Porter
Creating Shared Value in Products and Markets
Jain Irrigation Systems
• Drip irrigation equipment for small farmers in Africa and India
• Serves 4 million farmers worldwide as of 2012
• Reduces water use by over 40%
• Enables higher crop yields that improve food security while raising
farmers’ income
• Jain is now a $820 million business that is rapidly growing
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Copyright 2013 © Professor Michael E. Porter
Shared Value in the Value Chain
Fibria, Brazil
• Fibria, a large manufacturer of pulp for paper, utilizes planted eucalyptus
trees rather than native and old growth forests
• The company also encourages small-scale producers near its mills to plant
eucalyptus in conjunction with other crops, assisting them with technical
training and inputs
• Fibria achieves far greater resource efficiency versus old growth forest
production, with eucalyptus yielding 30 times higher yield per acre of wood
pulp
• Small scale producers contribute 27% of the raw material volume utilized in
Fibria mills, improving efficiency
• 4000 households have significantly increased their income
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Copyright 2013 © Professor Michael E. Porter
Improving the Business Environment: Upgrading Channels
Arca Continental
• Arca Continental is the second largest bottling company in Latin America, and one of
the largest Coca-Cola bottlers in the world
• Arca Continental established a program to train and invest in the micro-entrepreneur
retailers who sell more than 60% of the Company’s products, including management,
sales and marketing and merchandising
• Invests in low energy use coolers and fixture improvements
• Participating retailers register sales increases of 25% or more, with improved customer
satisfaction, leading to similar increases in the sales of Arca’s products
• Arca Continental recovers its investment in 6 months or less
• Beginning in Mexico, the program is being extended to Argentina and Ecuador
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Copyright 2013 © Professor Michael E. Porter
Skill and Supplier Development
Rio Tinto, Canada
Rio Tinto’s Diavik Diamond mine has helped create a variety of community based
training partnerships with communities, contractors, governments and educational
institutions in remote Northern Canada
• Education: Promotes careers in diamond mining. Offers apprenticeships that
employ and train students
• Worker training: Partners with communities, colleges and government to train
workers in mining related activities
• Supplier development: Sources local inputs and capacity building for local
providers of goods and services
• Rio Tinto hires 62% of its employees locally
• The company sources 71% of goods and services locally
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Copyright 2013 © Professor Michael E. Porter
Novartis Arogya Parivar Initiative
Rural India
Reconceiving Products
and Markets
• Portfolio of the
appropriate and
affordable medicines
from its originals,
generics, and over-thecounter (OTC)
businesses
• Adapted packs of some
OTC medicines (appeal
and size) to address
limited consumers’
ability to spend out-ofpocket on healthcare
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Redefining Productivity
in Value Chain
• Local sales teams that
know the culture and
speak the dialect, which
provided access to crucial
market intelligence and
reduced mistrust
• Dense network of local
distributors to reduce
stock-outs
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Enabling Regional
Development
• Community health
education program to
address lack of healthseeking behavior
• Frequent health camps
with physicians brought
into rural areas
• Microfinance partners to
improve healthcare
infrastructure and access
to working capital
Copyright 2013 © Professor Michael E. Porter
New Stakeholder Roles and Relationships
• Shared value thinking is driving new relationships between companies, philanthropists,
NGOs, and government in addressing social issues
Companies
Traditional Roles
New Roles
• Donate to charitable causes
• Initiate and scale shared value strategies
Philanthropists • Donate to charitable causes
• Partner with companies and NGOs to
catalyze shared value initiatives
NGOs
• Receive grants to provide
social services
• Enable implementation of new shared value
business models
Governments
• Tax business and regulate
business practices; operate
social programs
• Partner with companies and NGOs to make
platform investments and support shared
value strategies
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Copyright 2013 © Professor Michael E. Porter
Redefining the Role of Business
• Businesses acting as businesses, not as charitable givers, are arguably the most
powerful force for addressing many of the pressing issues facing our society
• Shared value gives rise to far broader opportunities for economic success than
conventional management thinking
• Shared value thinking will drive the next wave of innovation, productivity, and
economic growth
• A transformation of business practice around shared value gives purpose to the
corporation
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Copyright 2013 © Professor Michael E. Porter
The Dual Challenges of Development
Social
Development
Economic
Development
• There is a powerful connection between economic and social development
• Improving competitiveness requires improving the economic and social
context simultaneously
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Copyright 2013 © Professor Michael E. Porter