Michael E. Porter: Competitiveness for the Third Millennium: Implications for Croatia by Hrvoje Budin

Competitiveness for the Third Millennium: Implications for Croatia Professor Michael E. Porter Harvard Business School CEO Agenda Forum Zagreb, Croatia May 15, 2009 This presentation draws on ideas from Professor Porter’s books and articles, in particular, Competitive Strategy (The Free Press, 1980); Competitive Advantage (The Free Press, 1985); “What is Strategy?” (Harvard Business Review, Nov/Dec 1996); “Strategy and the Internet” (Harvard Business Review, March 2001); and a forthcoming book. 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. Additional information may be found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu. Version: May 13, 2pm 20090515 – CAON Crotia.ppt

The Croatian Economy in 2009 • Croatia has experienced solid growth rates over the last few years • The global economic crisis is now starting to take its toll

• Despite the recent period of growth, Croatia is facing serious competitiveness challenges • Croatia needs to address these issues aggressively instead of hoping for an automatic return to growth after the crisis • Croatia lacks a clear strategy and the effective use of public-private organizational structures to improve competitiveness 20090515 – CAON Crotia.ppt

Prosperity Performance Selected Countries PPP-adjusted GDP per Capita, 2007 ($USD)

$50,000 $45,000

United States

$40,000

Switzerland Kuwait Austria Sweden

$35,000

Norway ($54,604)

Qatar ($57,175, 0.92%)

Italy

$30,000

Bahrain

Taiwan Greece Slovenia

New Zealand

Israel

Cyprus Saudi Arabia

Malta

South Korea

Czech Republic

Oman

$20,000

Hungary Libya Mexico

$15,000 $10,000

Argentina

Lebanon

Brazil Belize

Guatemala El Salvador Yemen

$5,000

Eastern and Southern Europe Other countries

Hong Kong

Singapore

Canada Australia Finland UK Germany Japan France Spain

UAE

$25,000

Ireland

Poland Malaysia Chile Turkey

Estonia

Slovakia

Croatia

Russia Bulgaria

Iran

Romania

South Africa Macedonia Thailand Bosnia & Herzegovina Albania Egypt Jordan Moldova Syria Philippines Vietnam India Laos Pakistan

$0 2%

10%

Lithuania Latvia (12.6%) Kazakhstan (12.3%) Belarus Ukraine China (13.0%) Cambodia

12%

Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2000 to 2007 Note: highlighted countries are part of the East African Community (EAC). Source: EIU (2009), authors calculations 20090515 â&#x20AC;&#x201C; CAON Crotia.ppt

What is Competitiveness? • Competitiveness depends on the productivity with which a nation uses its human, capital, and natural resources. – Productivity sets the sustainable standard of living (wages, returns on capital, returns on natural resources) – 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 arises from a combination of domestic and foreign firms – The productivity of “local” or domestic industries is fundamental to competitiveness, not just that of export industries

• 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 20090515 – CAON Crotia.ppt

Comparative Labor Productivity Selected Countries

Real GDP per employee (PPP adjusted US$), 2008

$90,000

USA Ireland

$80,000

Hong Kong

Eastern and Southern Europe Other countries

France

$70,000 Italy

Austria Canada Australia

Spain

$60,000

UK Finland Germany

Switzerland

Greece

Japan

Oman

Malta

$50,000

New Zealand Cyprus

Slovenia

Hungary

Korea

Slovakia

Czech Republic

Croatia

Portugal

$40,000

Saudi Arabia

Poland

Lithuania

Estonia

Turkey

Iran Peru

$20,000

Syria

Cote d’Ivoire

Cameroon Senegal

Zimbabwe (-8.9%)

$0 -2%

-1%

Latvia

Russia Romania

Bulgaria

Brazil

Algeria

$10,000

Malaysia

Mexico Argentina

Chile Macedonia

$30,000

Tunisia

Thailand Morocco Pakistan

Belarus (8.6%)

Kazakhstan

China (10.1%) Indonesia Angola (14.0%) India Bangladesh Nigeria Vietnam Cambodia Uganda Mozambique Ghana Philippines

Kenya

South Africa Albania Egypt Ukraine

Growth of real GDP per employee (PPP-adjusted), 2004 to 2008 Source: authors calculation Groningen Growth and Development Centre (2009), EIU (2009) 20090515 – CAON Crotia.ppt

Labor Force Utilization Labor Force Participation Rate, 2008 65%

60%

Participation Rates, Selected Countries

Eastern and Southern Europe Other countries

Kuwait

China

Singapore Iceland

Thailand

55%

50%

Brazil

45%

40%

35%

Colombia Philippines

Norway Canada Australia Vietnam Sweden Germany Russia Denmark New Zealand Latvia Japan Czech Rep. Ireland Estonia USA UK Finland Spain Cyprus South Korea Slovakia Indonesia Lithuania Ukraine Netherlands France Slovenia India Greece Poland Romania Macedonia Chile Austria Ghana Italy Hungary Mexico Argentina Israel Malaysia Moldova Cote d’Ivoire

Turkey

Albania

Croatia

Nigeria

Bulgaria

Pakistan

30%

Tunisia

South Africa

Egypt Libya Saudi Arabia

25% -3%

•

-2%

-1% 0% 1% 2% 3% Change in Labor Force Participation Rate, 2004 to 2008

With many of its less productive citizens outside of the active labor force, Croatian labor productivity is overstated versus peers Source: Economist Intelligence Unit (2009)

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Export Performance Selected Countries

Exports of Goods and Services (% of GDP), 2008 100%

Malaysia (103.5%)

90% Ireland

80%

Czech Republic Netherlands Thailand

Estonia

70%

Belarus

60%

Cyprus Ukraine (-17.5%) Moldova Philippines

30% 20% 10% 0% -15%

Taiwan Slovenia

Saudi Arabia

Latvia Poland Bolivia Israel China South Africa Canada Portugal Russia New Zealand Romania Mexico Italy Indonesia Peru Spain France UK India Argentina Bangladesh Greece Australia Albania Turkey Japan Benin Brazil USA Pakistan

Ethiopia

-5%

Egypt

Eastern and Southern Europe Other countries

Burundi

-10%

Hungary Vietnam

Bulgaria Lithuania Austria Korea Denmark Jordan Sweden Macedonia Croatia Norway Germany Chile Iceland Finland

Cambodia

50% 40%

Slovakia

Belgium

10%

15%

20%

Change in Exports of Goods and Services (% of GDP), 2004 to 2008 Source: EIU (2008), authors’ analysis 20090515 – CAON Crotia.ppt

Croatia’s Exports By Type of Industry World Export Market Share (current USD)

0.50%

Processed Goods Semi- and Unprocessed Goods Services TOTAL

0.45% 0.40% 0.35% 0.30% 0.25% 0.20% 0.15% 0.10% 0.05% 0.00%

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Source: UNComTrade, WTO (2008) 20090515 – CAON Crotia.ppt

Domestic Fixed Investment Rates Selected Countries

Gross Fixed Investment as % of GDP, 2008 36%

India Nicaragua

China (40.8%) Eastern and Southern Europe Other countries

Romania (11.1%) Bulgaria (12.6%)

Croatia

32%

Vietnam (44.6%)

Belarus Latvia

Estonia

28%

Spain

Korea

Thailand

Australia Slovenia

Kazakhstan Slovakia Ukraine

Czech Rep.

24% Albania

Iceland Japan Austria

Chile

Colombia

Argentina Mexico Canada Cambodia Denmark France Russia Poland Portugal Switzerland Cyprus Belgium Macedonia Norway South Africa Italy Netherlands Finland Sweden Pakistan Malaysia Turkey Egypt Saudi Arabia Germany Malta Brazil

New Zealand

Ireland Greece Hungary 20% Hong Kong

Tunisia

Singapore

Indonesia Lithuania

Israel UK

16% USA

12% -4%

Philippines

-2%

Change in Gross Fixed Investment (as % of GDP), 2004 to 2008 Note: Includes inbound FDI Source: EIU, 2009 20090515 â&#x20AC;&#x201C; CAON Crotia.ppt

Inbound Foreign Investment Performance Inward FDI Stocks as % of GDP, Average 2003 - 2007

Stocks and Flows, Selected Countries

80%

Estonia

Netherlands Eastern and Southern Europe Other countries

70%

Singapore (160.1%, 64.7%) Hungary Switzerland

New Zealand

20% 10% 0% -5%

Bulgaria (69%) Sweden

Czech Republic

50%

30%

Cyprus

Vietnam

60%

40%

Chile

Denmark

Slovakia

Croatia

Kazakhstan

Cambodia UK Macedonia Spain Thailand Philippines Moldova Australia Canada Latvia Iceland (46.7%) Egypt Poland South Africa Finland Lithuania Franc Israel Romania Armenia e Bosnia & Colombia Mexico Laos Norway Herzegovina Austria Brazil Russia Slovenia Ukraine German Turke Greece Chinay USA Malaysia y South Korea Saudi Arabia Ital Pakista Indonesia Belarus y n India Japan Portugal

10%

15%

20%

25%

30%

35%

40%

FDI Inflows as % of Gross Fixed Capital Formation, Average 2003 - 2007

Source: UNCTAD, World Investment Report (2009) 20090515 – CAON Crotia.ppt

•

Foreign direct investment inflows have been a key driver of economic growth 10

Foreign Investment in Croatia Selected Activities

Average FDI by activity, millions of €

2,750

2000 2,250

2006 2007

1,750

2008* 1,250

750

Source: Foreign Direct Investment in Croatia (by activity), Croatian National Bank, 2009 20090515 – CAON Crotia.ppt

Recreation and Sports

Construction

Water purification and distrubtion

Automotive

Mft. machinery and equipment

Food Products

Hospitality

Retail Trade

Wholesale Trade

Other Activities

Real Estate

Chemicals

Telecommunications

*2008 is estimated figure.

Oil, Gas and Coal

-250

Financial Services

250

Innovative Capacity Innovation Output of Selected Countries Average U.S. patents per 1 million population, 2003-2007

Slovenia

8 7 6 Hungary

5 4

Malaysia Czech Republic

3 2 1

South Africa Brazil Mexico Argentina Indonesia Thailand Colombia

0 -30%

-20%

-10%

Croatia

Greece

Estonia

Romania Belarus Chile Poland Russia Egypt Portugal

Saudi Arabia Philippines

China

India

10%

20%

CAGR of US-registered patents, 2003 – 2007 Source: USPTO (2008), EIU (2008) 20090515 – CAON Crotia.ppt

30%

40%

Causes of 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

Natural Endowments

• Productivity ultimately depends on improving the microeconomic capability of the economy and the sophistication of local competition 20090515 – CAON Crotia.ppt

Macroeconomic Competitiveness Social Infrastructure and Political Institutions •

Macroeconomic Policies

Basic human capacity – –

Fiscal policy

•

Monetary policy

•

Economic openness

Education Health

•

Safety and security

•

Political institutions

•

Rule of law

20090515 – CAON Crotia.ppt

•

Croatia’s Competitiveness Progress on the Competitiveness Index

2007

2008

Estimated Ranking: New Global Competitiveness Index

Macroeconomic Competitiveness

58 91

59 84

Microeconomic Competitiveness

GDP Per Capita Rank (ppp-adjusted)

Social Infrastructure and Political Institutions Macroeconomic Policy

Note: Rank versus 130 countries; overall, Croatia ranks 48th in 2008 PPP adjusted GDP per capita and 63rd in Global Competitiveness Source: Institute for Strategy and Competitiveness, Harvard University (2009) 20090515 – CAON Crotia.ppt

Governance Indicators Best country in the world

Selected Countries Voice and Accountability Political Stability Government Effectiveness Regulatory Quality Rule of Law Control of Corruption

Index of Governance Quality, 2006

D E ET NM H ER AR LA K N AU D S ST U NI R I R TE EL I A D KI AN D N G U GE DO NI TE RM M D AN S Y PO TAT R ES TU G A C YP L R US S C ZE SL PA O IN C V H RE EN PU IA SL BL O IC VA K LA I A LI TV TH IA UA G NI R A EE PO C E LA N C RO D BU AT LG IA R ARI O M A AN BR IA AZ IL IN D I C A HI NA R US SI A

Worst country in the world

Note: Sorted left to right by decreasing average value across all indicators. The ‘zero’ horizontal line corresponds to the median country’s average value across all indicators. Source: World Bank (2008) 20090515 – CAON Crotia.ppt

Corruption Perception Index, 2007 1

Deteriorating Low corruption

Israel

Rank in Global Corruption Index, 2007

Tunisia Peru

Finland

New Zealand Sweden Improving Iceland Switzerland Norway Canada UK Hong Kong Austria Germany Ireland Japan United States France Chile Spain Uruguay Slovenia Portugal Estonia Taiwan Czech Republic Hungary South Korea Malaysia Italy South Africa Lithuania Slovakia Latvia Jordan Greece Poland Turkey Croatia Brazil

Panama Egypt

Mexico

Ukraine

Vietnam Pakistan

Russia

Indonesia Nigeria

Bangladesh

Venezuela

-20

Tanzania Uganda

Cote d’Ivoire

Zimbabwe

Romania Senegal India

Thailand

Argentina

Philippines High corruption

Colombia China

-15

-10

-5

Change in Rank, Global Corruption Report, 2007 versus 2001

Note: Ranks only countries available in both years (91 countries total) Source: Global Corruption Report, 2007 20090515 – CAON Crotia.ppt

Macroeconomic Competitiveness • Croatia has a solid position in terms of basic human development indicators, in line with many other former Communist countries • Croatia has made some progress on macroeconomic policy indicators, but the current global crisis will test the sustainability of these improvements – Croatia has been running high current account deficits for the last decade

• Croatia remains a regional laggard in terms of political and legal institutional quality and there are few signs of fundamental improvements

•

Croatia has much work to do to improve its macroeconomic competitiveness, especially its institutions

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Croatia’s Position Microeconomic Competitiveness

2007

2008

National Business Environment

Company Operations and Strategy

Estimated Microeconomic Competitiveness Index

Microeconomic Competitiveness: Quality of the Business Environment Context Contextfor for Firm Firm Strategy Strategy and andRivalry Rivalry 

– e.g. salaries, incentives for capital investments, intellectual property protection, corporate governance standards

Factor Factor (Input) (Input) Conditions Conditions  

– – – – –

Demand Demand Conditions Conditions

Vigorous local competition – Openness to foreign competition – Competition laws

Access to high quality business inputs Natural endowments Human resources Capital availability Physical infrastructure Administrative and information infrastructure (e.g. registration, permitting, transparency) – Scientific and technological infrastructure

Local rules and incentives that encourage investment and productivity



Sophistication of local customers and needs

Related Relatedand and Supporting Supporting Industries Industries 

– e.g., Strict quality, safety, and environmental standards – Consumer protection laws

Availability 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 20090515 – CAON Crotia.ppt

Factor (Input) Conditions

Factor Factor (Input) (Input) Conditions Conditions

Croatia’s Relative Position 2008

Competitive Advantages Relative to GDP per Capita

Competitive Disadvantages Relative to GDP per Capita

Mobile telephone subscribers per 100 population

Protection of minority shareholders’ interests

Telephone lines per 100 population

Burden of government regulation

Quality of roads

Time required to start a business

Quality of math and science education

Venture capital availability

Internet users per 100 population

Quality of port infrastructure

Utility patents per million population

Quality of air transport infrastructure

Ease of starting a new business

Ease of access to loans

Personal computers per 100 population

Brain drain

Quality of telephone infrastructure

Quality of management schools

Quality of electricity supply

Regulation of securities exchanges

Quality of railroad infrastructure

Financial market sophistication

Number of procedures required to start a business

Burden of customs procedures

Quality of scientific research institutions

Quality of the educational system

Demand conditions

Soundness of banks

University-industry research collaboration

Tertiary enrollment

Change up/down of more than 5 ranks since 2007

101

Context Contextfor forFirm Firm Strategy Strategy and andRivalry Rivalry

Context for Strategy and Rivalry Croatia’s Relative Position 2008

Competitive Advantages Relative to GDP per Capita Low Tariff rates

Competitive Disadvantages Relative to GDP per Capita Business impact of rules on FDI Cooperation in labor-employer relations Low market disruption from state-owned enterprises Impact of taxation on incentives to work and invest Rigidity of employment Effectiveness of antitrust policy Extent of market dominance by business groups Efficacy of corporate boards Strength of investor protection Pay and productivity Distortive effect of taxes and subsidies on competition Restrictions on capital flows Strength of auditing and reporting standards Prevalence of trade barriers Intensity of local competition Intellectual property protection Regulatory quality

Change up/down of more than 5 ranks since 2007

114 110 110 103 102 98 98 98 95 88 80 76 76 73 71 68 54

Doing Business Indicators Ranking, 2009 (of 181 countries)

Favorable

Unfavorable

180 160

Median Ranking, Central EU countries*

140 120 100 80 60

Croatia’s per capita GDP rank: 46

40 20 0

Ease of Doing Business

Paying Taxes

Enforcing Contracts

Getting Credit

Closing a Business

Trading Across Borders

Registering Starting a Protecting Employing Property Business Investors Workers

Dealing with Licenses

* Central European EU countries include: Austria, Bulgaria, the Czech Republic, Estonia, Greece, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia Source: World Bank Report, Doing Business (2009) 20090515 – CAON Crotia.ppt

Demand Demand Conditions Conditions

Demand Conditions Croatia’s Relative Position 2008

Competitive Advantages Relative to GDP per Capita

Competitive Disadvantages Relative to GDP per Capita Buyer sophistication

Government success in ICT promotion

Government procurement of advanced technology products

Presence of demanding regulatory standards

Stringency of environmental regulations

Change up/down of more than 5 ranks since 2007

Croatia’s Business Environment Quality Overview • Basic factor conditions are relatively strong but weaknesses exist in more advanced dimensions – Relative strength in road transportation and communications infrastructure as well as fundamental innovative capacity – Relative strength in primary and secondary education – Relative weakness in financial market sophistication – Relative weakness in port and airport infrastructure

• Business rules and regulations remain cumbersome and distortive – Problematic labor relations – Local market still dominated by entrenched domestic business groups – Rules and regulations for foreign direct investors are cumbersome

20090515 – CAON Crotia.ppt

Competitiveness and Cluster Development Tourism Cluster in Cairns, Australia Public Public Relations Relations && Market Market Research Research Services Services

Travel Travel agents agents

Tour Tour operators operators

Food Food Suppliers Suppliers

Attractions Attractions and and Activities Activities

Restaurants Restaurants

e.g., e.g., theme theme parks, parks, casinos, casinos, sports sports

Property Property Services Services Maintenance Maintenance Services Services

Government Government agencies agencies

e.g. e.g. Australian Australian Tourism Tourism Commission, Commission, Great Barrier Reef Authority Great Barrier Reef Authority

Airlines, Airlines, Cruise Cruise Ships Ships

Hotels Hotels

Educational Educational Institutions Institutions e.g. e.g. James James Cook Cook University, University, Cairns College of Cairns College of TAFE TAFE

Local Local retail, retail, health health care, care, and and other other services services Local Local Transportation Transportation Souvenirs, Souvenirs, Duty Duty Free Free Banks, Banks, Foreign Foreign Exchange Exchange

Industry Industry Groups Groups

e.g. e.g. Queensland Queensland Tourism Tourism Industry Council Industry Council

Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden 20090515 â&#x20AC;&#x201C; CAON Crotia.ppt

The Australian Wine Cluster Trade Performance Australian Wine Exports in thousand US $

Australian Wine World Export Market Share

$2,700,000 $2,400,000

10.0%

Value Market Share

$2,100,000

8.0% $1,800,000 $1,500,000

6.0%

$1,200,000 4.0%

$900,000 $600,000

2.0%

$300,000 $0

0.0% 1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database. 20090515 â&#x20AC;&#x201C; CAON Crotia.ppt

The Australian Wine Cluster History 1991 to 1998

1930

1965

1980

First oenology course at Roseworthy Agricultural College 1955

Australian Wine Bureau established

Australian Wine and Brandy Corporation established 1990

1970

New organizations created for education, research, market information, and export promotions Winemaker’s Federation of Australia established

Winemaking school at Charles Sturt University founded

Australian Wine Research Institute founded

1950s

1960s

1970s

1980s

1990s

Import of European winery technology

Recruiting of experienced foreign investors, e.g. Wolf Bass

Continued inflow of foreign capital and management

Creation of large number of new wineries

Surge in exports and international acquisitions

Source: Michael E. Porter and Örjan Sölvell, The Australian Wine Cluster – Supplement, Harvard Business School Case Study, 2002 20090515 – CAON Crotia.ppt

The Evolution of Regional Economies San Diego Hospitality and Tourism

Climate and Geography

Sporting and Leather Goods

Transportation and Logistics Power Generation

U.S. Military

Communications Equipment

Aerospace Vehicles and Defense

Information Technology

Analytical Instruments Education and Knowledge Creation

Medical Devices

Bioscience Research Centers Centers

1910 20090515 â&#x20AC;&#x201C; CAON Crotia.ppt

1930

1950 29

Biotech / Pharmaceuticals

1970

Related Relatedand and Supporting Supporting Industries Industries

Related and Supporting Industries Croatia’s Relative Position 2008

Competitive Advantages Relative to GDP per Capita

Competitive Disadvantages Relative to GDP per Capita State of cluster development

105

Extent of collaboration in clusters

Local supplier quantity

Supporting and related industries and clusters

Local supplier quality

Local availability of process machinery

Change up/down of more than 5 ranks since 2007

National Cluster Export Portfolio Croatia, 1997 to 2007

0.5%

Change In Croatia’s Overall World Export Share: 0.029%

Hospitality and Tourism (1.11%) Power and Power Generation Equipment

Marine Equipment (0.85% ,1.26%)

Croatia’s world export market share, 2007

Tobacco

0.4% Construction Materials

0.3%

Prefabricated Enclosures and Structures

Furniture Footwear (-0.34%) Communication Services

Building Fixtures and Equipment

Transportation and Logistics

Leather and Related Products

Processed Foods

0.2%

Croatia’s Average World Export Share: 0.16%

Fishing and Fishing Related Products

Apparel Forest Products Business Services

0.1%

Construction Services Plastics

Oil and Gas

Publishing and Printing Agriculture Products

Heavy Machinery Biopharmaceuticals Production Technology Light and Elec. Equipment Metal, Mining and Manufacturing Communications Equipment Jewelry, Precious Metals and Collectibles Analytical Instruments Chemical Products Automotive Information Technology Financial Services Entertainment

0.0% -0.2%

-0.1%

0.0%

0.1%

0.2%

0.3%

0.4%

Change in Croatia’s world export market share, 1997 to 2007 Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics. 31 20090515 – CAON Crotia.ppt

0.5%

0.6%

Competitiveness and the Composition of the Economy Linkages Across Clusters Fishing & Fishing Products

Entertainment Hospitality & Tourism

Agricultural Products

Transportation & Logistics

Distribution Services Jewelry & Precious Metals

Aerospace Vehicles & Information Defense Tech.

Business Services Financial Services

Education & Knowledge Creation

Publishing & Printing

Leather & Related Products

Medical Devices

Furniture Construction Materials Processed Food

Heavy Construction Services

Lightning & Electrical Equipment

Forest Products

Power Generation

Heavy Machinery Motor Driven Products

Production Technology

Tobacco

Oil & Gas Plastics

Aerospace Engines

Footwear

Note: Clusters with overlapping borders or identical shading have at least 20% overlap (by number of industries) in both directions. 20090515 â&#x20AC;&#x201C; CAON Crotia.ppt

Building Fixtures, Equipment & Services

Communications Equipment

Biopharmaceuticals Chemical Products

Apparel

Analytical Instruments

Textiles Prefabricated Enclosures

Metal Automotive Manufacturing

Share of World Exports by Cluster < 0.04%

Croatia, 2007

0.04 – 0.08% 0.08 – 0.16% 0.16 – 0.32%

Fishing & Fishing Products

0.32 – 0.64% > 0.64% Distribution Services

Entertainment Hospitality & Tourism

Agricultural Products Transportation & Logistics

Aerospace Vehicles & Information Defense Tech.

Business Services

Jewelry & Precious Metals Financial Services

Education & Knowledge Creation

Publishing & Printing

Leather & Related Products

Medical Devices

Building Fixtures, Equipment & Services

Furniture Construction Materials Processed Food

Heavy Construction Services

Lightning & Electrical Equipment

Communications Equipment

Biopharmaceuticals Chemical Products

Apparel

Analytical Instruments

Textiles Prefabricated Enclosures

Forest Products

Power Generation

Motor Driven Products

Heavy Machinery

Production Technology

Tobacco

Oil & Gas

Aerospace Engines

Plastics

Footwear

Automotive Metal Manufacturing

Sporting & Recreation Goods

Marine Equipment

Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions. 20090515 – CAON Crotia.ppt

Croatian Maritime Cluster Worldwide Shipping and Logistics Industry

Local Transport Industry (Ferries)

Yacht Retail (Europe)

Related Cluster: Adriatic Tourism

Specialized Suppliers 6’500 employees Engines

Design / Archit.

Technical Equipment

Fittings

Coatings

R&D

Supporting Industries 1’800 companies / 26’000 employees Plastics

Metal

Shipbuilding

Boatbuilding

6 companies ~ 20 ships p.a. 11’000 employees Value added: USD 750 million p.a.

~ 70 companies (commercial, yachts, “nutshell”) Value added: USD 80 million p.a.

Universities • University of Engineering and Boatbuilding, Zagreb • University of Boatbuilding, Split

Government Agencies

Industry Associations

Trade Unions

• Ministry of Economy, Labor and Entrepreneurship • Ministry of Sea, Tourism and Transport • Croatian Privatization Fund

• Brodarski Institut • Boatbuilding Association at Croatian Chamber of Commerce • Association of Boat Equipment Producers at Croatian Chamber of Commerce • Shipbuilding Cluster at Croatian Employers Association.

• Association of Metal Workers • Association of Workers Trade Unions of Croatia • Croatian Trade Union Association • ...

Related Clusters: Automotive / Metal Processing

Sources: Harvard Microeconomics of Competitiveness student team research (2009) - Jetemir Balaj, Neil McCullagh, Mirela Mrvelj, Peder Plaz, Malgorzata Steiner 20090515 – CAON Crotia.ppt

Shipbuilding Cluster Productivity Select European Countries

20090515 – CAON Crotia.ppt

Croatian Clusters • Croatia’s clusters have developed naturally and reflect the strengths of legacy and location but also the challenges of the current business environment conditions • Clusters provide an important perspective to understand the issues facing the Croatian economy • Cluster-level competitiveness efforts are less politicized and enable action on more tractable issues related to productivity • Cluster efforts are an opportunity to engage in a new model of publicprivate dialogue and cooperation

• Clusters are so far an unexploited dimension of economic policy that Croatia can ill-afford to neglect 20090515 – CAON Crotia.ppt

Cluster-Based Policy Implementation Science and Technology Investments (e.g., centers, university departments, technology transfer)

Education and Workforce Training Management Training

Standard setting and quality initiatives

Business Attraction

Clusters Environmental Stewardship

Export Promotion

Market Information and Disclosure

Natural Resource Protection Physical Infrastructure

• Clusters provide a framework for implementing public policy and organizing public-private collaboration to enhance competitiveness 20090515 – CAON Crotia.ppt

Geographic Levels and Competitiveness World Economy

WTO

Broad Economic Areas

Europe

Groups of Neighboring Nations

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Southeast Europe

Nations

Croatia

States, Provinces

Regions

Metropolitan and Rural Areas

Zagreb

Specialization of Regional Economies Selected U.S. Geographic Areas

Seattle-BellevueSeattle-BellevueEverett, Everett,WA WA Aerospace AerospaceVehicles Vehiclesand and Defense Defense Fishing Fishingand andFishing Fishing Products Products Analytical AnalyticalInstruments Instruments

Denver, Denver,CO CO Leather Leatherand andSporting SportingGoods Goods Oil and Gas Oil and Gas Aerospace AerospaceVehicles Vehiclesand andDefense Defense

Chicago Chicago Communications CommunicationsEquipment Equipment Processed ProcessedFood Food Heavy HeavyMachinery Machinery

Wichita, Wichita,KS KS Aerospace AerospaceVehicles Vehiclesand and Defense Defense Heavy HeavyMachinery Machinery Oil Oiland andGas Gas

Pittsburgh, Pittsburgh,PA PA Construction ConstructionMaterials Materials Metal MetalManufacturing Manufacturing Education Educationand andKnowledge Knowledge Creation Creation

San San FranciscoFranciscoOakland-San Jose Jose Bay Bay Area Area Communications Equipment Equipment Agricultural Agricultural Products Products Information Information Technology

Los Los Angeles Angeles Area Apparel Apparel Building Building Fixtures, Fixtures, Equipment Equipment and Services Services Entertainment Entertainment

Boston Boston Analytical AnalyticalInstruments Instruments Education Educationand andKnowledge KnowledgeCreation Creation Communications CommunicationsEquipment Equipment

Raleigh-Durham, Raleigh-Durham,NC NC Communications CommunicationsEquipment Equipment Information InformationTechnology Technology Education Educationand and Knowledge KnowledgeCreation Creation

San SanDiego Diego Leather Leatherand andSporting SportingGoods Goods Power Generation Power Generation Education Educationand andKnowledge Knowledge Creation Creation

Houston Houston Oil Oiland andGas GasProducts Productsand andServices Services Chemical ChemicalProducts Products Heavy HeavyConstruction ConstructionServices Services

Atlanta, Atlanta,GA GA Construction ConstructionMaterials Materials Transportation Transportationand andLogistics Logistics Business BusinessServices Services

Note: Clusters listed are the three highest ranking clusters in terms of share of national employment. Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School, 11/2006. 20090515 – CAON Crotia.ppt

Croatian Counties

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Prosperity Performance Croatian Counties

GDP per Capita, 2008 (€)

$18,000

Croatia Average: 10.13% Zagreb (city)

$16,000

$14,000

$12,000

Istria Primorje-Gorski Kotar

$10,000

Varazdin Koprivnica-Krizevci

Croatia Average: $9,400

$8,000

Sisak-Moslavina Split-Dalmatia Osijek-Baranja

$6,000

Zagreb (county) Medjimurje Karlovac Bjelovar-Bilogora

Lika-Senj Dubrovnik-Neretva Zadar

Krapina-Zagorje Virovitica-Podravina Pozega-Slavonia Sibenik-Knin Brod-Posavina

Vukovar-Srijem

$4,000 8%

10%

11%

12%

13%

14%

15%

Growth of GDP per Capita (€), CAGR, 2005 to 2008 Source: Croatia Central Bank, Croatia Statistical Institute 20090515 – CAON Crotia.ppt

The Neighborhood Southeastern Europe

• Economic coordination among neighboring countries can significantly enhance competitiveness 20090515 – CAON Crotia.ppt

Croatia’s Competitiveness Challenge • Croatia’s recent economic growth has been driven by natural catch-up following integration into the European and global economy • Process can only be sustained if Croatia is able to continuously upgrade its competitiveness • EU accession is an important opportunity, but the benefits will depend on reforms by Croatia to address its own competitiveness challenges Key Challenges • There are numerous weaknesses in the Croatian business environment • The vitality of competition remains weak as a consequence of policy choices and a relatively isolated domestic market • Clusters are present in the Croatian economy (e.g. tourism), but they have not been used as an effective policy tool • The institutional weaknesses of the country have been a key barrier to achieve sustain improvements • Croatian regions have not been challenged and enabled to contribute to competitiveness improvements 20090515 – CAON Crotia.ppt

Croatia’s Competitiveness Agenda Action Priorities • Address corruption and weaknesses in political and legal institutions • Ensure the sustainability of public finances • Reform the rules and regulations for business • Open up local markets to competition • Create attractive conditions for foreign investors • Strengthen the higher education system, financial markets, and airport/port infrastructure • Use clusters as an organizing principle for upgrading workforce skills, infrastructure, and FDI attraction • Support Croatian regions in their competitiveness efforts • Strengthen economic cooperation in South-East Europe 20090515 – CAON Crotia.ppt

The Process of Economic Development Shifting Roles and Responsibilities

Old Old Model Model

New New Model Model

•• Government Government drives drives economic economic development development through through policy policy decisions decisions and and incentives incentives

•• Economic Economic development development is is aa collaborative collaborative process process involving involving the the private private sector, sector, government government at at multiple multiple levels, levels, universities, universities, labor, labor, and and civil civil society society

• Competitiveness must become a bottoms-up process in which many individuals, companies, and institutions take responsibilities • Every community and cluster can take steps to enhance competitiveness • The private sector must become more engaged in competitiveness to improve rapidly 20090515 – CAON Crotia.ppt

Defining a Croatian Economic Strategy National NationalEconomic EconomicStrategy Strategy •

What can be the unique competitive position of Croatia given its location, legacy, endowments, and potential strengths? – What is its unique value as a business location? – What role can it play with neighbors? – In what range of clusters does the nation excel?

Developing DevelopingUnique UniqueStrengths Strengths

Achieving Achievingand andMaintaining MaintainingParity Parity with withPeers Peers

• What are the key potential strengths that Croatia must preserve or build?

• What weaknesses must be neutralized to achieve parity with peer countries?

• The private sector must lead the process of competitiveness improvement and provide continuity and accountability 20090515 – CAON Crotia.ppt

The Croatian Competitiveness Paradox

• Croatia has institutions like the National Competitiveness Council designed to guide competitiveness upgrading • Croatia has plans that identify the weaknesses the country needs to address BUT

• Croatia has made limited if any progress on upgrading its competitiveness in recent years

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The Moment For Action • The struggle for independence, the war with Serbia, and the path to political normality after the war have shifted political focus away from competitiveness • Economic growth due to a natural catch-up has been sufficiently good so that there has not been pressure for real reform • EU membership has been seen as the automatic path to competitiveness, requiring no further action within the country • Entrenched interest groups in the political and economic sphere have paid lip service to competitiveness but have been unwilling to engage in real reforms that threaten the status quo

• Leaders in business and government must launch a new chapter in Croatia’s economy if the country is to hold its gains, much less see further standard of living improvements

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