Transition Economies:
Porter Model Comparisons
Maj Ryan Craycraft

Introduction
• Thesis
• Porter Model Explanation
• Case Studies
– Russia
– Poland
– China
• Conclusion

Proposition
• If a country is to be successful in the global market economy, its domestic businesses must be competitive.
• IV: High levels of competitiveness
• DV: Successful Market Economy

Michael Porter’s Index
• Michael Porter, Harvard Business School has developed a competitive index
– “The Current Competitiveness Index examines the microeconomic bases of a nation’s GDP per capita.”
• Macroeconomic conditions are usually the object of study, but although necessary, they are not sufficient
• Microeconomic conditions are what actually create wealth and “sustainable productivity”
• Comparative in nature

Porter’s Model
• Like a business cycle, interactions among the previous activities help countries move along the macroeconomic country cycle

Porter’s Model
(Nat’l Corporate Culture)
(Consumers)
(Supply Context)
(Indirect Efficiencies)
• Business Environment Diamond, aka “The Diamond”

Poland
• Transition Plan:
– Free Elections
– Evolve to purely private economy
– Create the Institutions of a capitalist economy
• Rapidly to market economy
• Liberalize economic functions (int’l trade / FDI)
• Privatization
• Construct Social Safety Net
• Mobilize Int’l Monetary Aid

Poland’s Successes
• Solid GDP Growth
• Stable currency
• Solid Manufacturing Sector
• Exports
• FDI
• Small / Medium business growth

Poland’s Challenges
• Poor Infrastructure
• Political Instability
• Small inflation (<5%)
• Social Safety Net in jeopardy
• Unemployment (esp. eastern Poland)
• Debt of 50% GDP (2004)

Poland in Porter’s Framework
• Moving from Factor Driven to Investment Driven
• Strong Manufacturing Sector, esp. automobiles due to relatively cheap, educated labor force
•Strong FDI

Poland in Porter’s Diamond
(Nat’l Corporate Culture)
(Supply Context)
(Indirect Efficiencies)
•Neutral Achievement
•Balanced Income and Competitiveness
(Consumers
$14K PPP)

Russia: A Middle Income Country
• Also a shock-therapy transition
• #1 CIS country, but behind E. Europe countries
– No EU Charter guidance

Russia: Strengths
• Macroeconomic Stability (oil revenue)
– 7 th highest fiscal surplus in 2006
• Cold War capacities
– Higher education
– Research institutions spurring innovation
– Cultural factors that support innovation
• Flexible labor market

Russia: Challenges
• Public institutions
• Health factors
– Infant mortality
– Life expectancy
• Petrodollars preventing necessary painful reforms
• Inflation near 10%
• Technological readiness of business sector
• Low intensity of domestic competition

Russia in Porter’s Framework
• Classified by WEF in the Efficiency-driven stage
• “Needs to focus on higher education and training, market efficiency and technological readiness”
• While continuing public institution reform

Russia in Porter’s Diamond
(Low Competitiveness)
(Mixed Bag)
(Supporting Infrastructure)
•Overachieving Country
•High Income compared to low competitiveness index
(Consumers
$12K PPP)

China: Commanded Transition
• Slow transition method
• Excess production allowed to go the open market
• When private enterprise failed, it was cancelled
• Government-controlled financial system

China: Strengths
• Macroeconomic indicators
– High growth rates
– Low inflation
– High savings rate
– Moderate public debt

China: Challenges
• State-controlled banking sector
• Low penetration of technology in industry
• Poor secondary / tertiary education system
• Public and Private institution quality
– Turning to capital punishment for corruption
– Burdensom government regulation
– Poor property rights
– Judiciary lacks independence

China in Porter’s Framework
• Moving from capture of cheap labor to need for efficiency to compete because cheap labor in other places
•Same as Russia’s recommendations:
• “Needs to focus on higher education and training, market efficiency and technological readiness”
• While continuing public institution reform

China in Porter’s Diamond
(Low Technology)
(Macro indicators
Public Institutions)
(Supporting Infrastructure)
•Underachieving Country
•Low Income compared to higher competitiveness index
(Consumers
$7.5K PPP)

Conclusion
• Transition from Factor-driven economy to
Investment-driven economy has coincided with evolution from developing country to middle-income, developed country
• New challenge will be to move from
Investment-driven to Innovation-driven in order to sustain growth

References
• Porter, Michael E. “Enhancing the Microeconomic Foundations of Prosperity: The Current
Competitiveness Index”
• Hunter, Richard J. and Leo V. Ryan, “A Transitional Analysis of the Polish Economy: After Fifteen
Years, Still a ‘Work in Progress,” Global Economic Journal 5:2, 2005.
• Economist.com, Poland Country Briefing Factsheet,
• Marageta Drzeniek, “Russia’s Competitiveness at the Crossroads”, Paper presented at World
Economic Forum Russia CEO Roundtable, June 2007, http://www.weforum.org/en/events/russia2007/index.htm
• Economist.com, China Country Briefing Factsheet,
• Porter, Michael E., World Economic Forum, World Competitiveness Report 2006-2007