cluster basics: competitiveness - coming to grips with a difficult term

Competitiveness:Coming to Grips With a Difficult Term

Prof. Christian H. M. KetelsInstitute for Strategy and Competitiveness

Harvard Business School

14th TCI Annual ConferenceAuckland, New Zealand

1 December 2011

The Current Economic Context

Achieving

Spend

US, Europe, and Japan

Achieving

Provide Cheap Labor

Much of the Rest


Achieving sustainable prosperity

growth

Save

Improveproductivity

Sell Natural Resources

Achieving sustainable prosperity

growth

• What do we know about the drivers of productivity differences across locations?

• How can locations devise an effective competitiveness strategy to support high and rising levels of productivity and prosperity?


support high and rising levels of productivity and prosperity?

• What’s the role of clusters in competitiveness?

Explaining Differences in ProductivityTheory-Driven Approaches

KnowledgeKnowledgeCreationCreation

• Knowledge creation overcomes the challenges of diminishing returns

• Invest in education and the knowledge-creating sectors of the economy

InstitutionsInstitutions

• Institutional legacy largely explains current outcomes

• Room for current policy choices?


FactorFactorAccumulationAccumulation

CreationCreation sectors of the economy

• Empirically not proven to be sufficient

• Capital deepening as a key driver of prosperity

• Support savings and investment, attract capital

• Empirically not proven to be sufficient

• Provide a solid conceptual framework for understanding prosperity differences

• Little if any guidance to policy makers on how to improve prosperity

Explaining Differences in ProductivityData-Driven Approaches

‘Benchmarking’

CompetitivenessCompetitivenessIndicatorsIndicators

• Provide country-specific data and rankings on specific dimensions of competitiveness

Provide data

CompetitivenessCompetitivenessIndexesIndexes

• Create synthetic aggregates of indicators to rank overall competitiveness

Provide data


Empirical Growth Empirical Growth LiteratureLiterature

• Many factors matter for prosperity outcomes; let the data show which ones matter most

• Openness, sound money, and strong property rights matter most ‘on average’

• Empirically not proven sufficient

• Generic blue-print of ‘ideal profile’, not how to get there

• Effective in increasing the willingness to change, not in identifying how

Analyze data

IndicatorsIndicators competitiveness

Explaining Differences in Economic PerformanceCompetitiveness

• The term competitiveness has been used widely and vaguely to capturewhat explains cross-country differences in economic performance

CostCost


Balance Productivity

Market ShareMarket Share

Views about Competitiveness – Ability to Sell

• Competitiveness as wages

• Competitiveness as market share


• Locations can achieve short-run growth in ways that ultimately hurt competitiveness

• Such approaches ultimately come at significant costs to their citizens and

undermine support for an open global economy

Views about Competitiveness – Balance

• Competitiveness as stable unit labor costs

• Competitiveness as a current account/trade surplus

• Competitiveness as sustainable public finances


• Locations that are competitive tend to display many of these characteristics,

but having these characteristics is no guarantee for prosperity

• Organizing policies around these goals is at best insufficient to achieve high

and growing standards of living

Views about Competitiveness: Productivity

• Competitiveness as the productivity

of the available labor force given the

quality of a location as a place to do

business

Prosperity

Labor Productivity

Labor Force Mobilization


• Labor productivity and labor force

mobilization are key drivers of prosperity

• Productivity is a symptom of the underlying competitiveness fundamentals

Competitiveness Fundamentals

Productivity Mobilization

Macroeconomic Competitiveness

Microeconomic Competitiveness (MICRO)

BusinessEnvironment

Quality

Sophisticationof Company

Operations andStrategy

Social

Clusters

The Productivity-based View of CompetitivenessDimensions of Competitiveness Fundamentals

CompanySophistication


MacroeconomicPolicy (MP)

SocialInfrastructure and Political

Institutions (SIPI)

Endowments

SizeNatural

ResourcesGeographic

Location

Testing the Productivity-based View of Competitiveness An Empirical Approach

• Data

– Broad set of data covering all dimensions of the framework

– Unit of observation is the average response per indicator, country, and year

– Data set is a panel across more than 130 countries and up to 8 years, using the

World Economic Forum’s Global Executive Survey and other sources

• Approach


– Step 1: Conduct separate, step-wise principal components analyses for MICRO, SIPI,

to derive their averages per country-year; simple average for MP

– Step 2: Comprehensive regression of MICRO, SIPI and MP on log GDP per capita

with endowment controls and year dummies.

Source: Delgado/Ketels/Porter/Stern, 2011

1 1 1

1 t

c,t MICRO c,t SIPI c,t MP c,t

END c,t t c,t

Ln Output per

Potential Worker MICRO SIPI MP

ENDOWMENTS year (1)

α β β β

α α ε

− − −

−

= + + + +

+ +

Findings: Competitiveness and Prosperity

• The linear model explains 83% of the variation of GDP per potential worker across countries

• The model reveals that each broad competitiveness category matters, even

when controlling for the others and for endowments

– Microeconomic factors areimportant, independent drivers

of prosperity Weights in


• Current conditions matter, even

when controlling for legacy effects

(institutional legacy, country fixed-effects)

• Extends the findings of the theory-driven literature

• Integrates the now available data in a coherent conceptual framework

Weights in overall model

SIPI 53%

MICRO 35%

Macro Policy 12%

100%

Source: Delgado/Ketels/Porter/Stern, 2011

• An integrated, empirically grounded framework to understand competitiveness and its relation to sustainable prosperity in general


• …but still little guidance on how to prioritize and sequence policies for a specific location

Social Infrastructureand Political Institutions

Macroeconomic Policies

The Two Sides of Competitiveness

Macroeconomic Competitiveness

Microeconomic Competitiveness

Company Sophistication

ClustersBusiness

Environment

• Largely driven by central government decisions

• “Good practice” standards apply

• Decisions taken by many

independent actors

• Action priorities highly context


• “Good practice” standards apply

universally

• Moderate level of interdependence

across policy areas

• Challenge is the political will to

implement a generic set of policies

• Action priorities highly context

dependent

• High level of interdependence

across policy areas

• Challenge is consensual choice of an integrated set of actions where limited resources have the highest impact in a given context

Analytical Approach

1. Track performance on a wide range of indicators from fundamental competitiveness to intermediate indicators to prosperity outcomes

2. Identify indicators as strengths or weaknesses relative to the countries current stage of development


3. Diagnose competitiveness fundamental-root causes of intermediate indicators and prosperity outcomes that stick out in such ways

4. Analyze complementarity across policy areas

5. Define an implementation strategy

Step 1: Dimensions of the Competitiveness Diagnostics

Prosperity Outcomes

Intermediate IndicatorsInnovation

FDI flows

Investment

ProductivityEquality

Labor utilization

Entrepreneurship

Quality of LifePurchasing

Power

Environmental conditions


Intermediate Indicators

Competitiveness

Global Competitiveness

Report

Doing Business

Governance

Logistical Performance Index

CorruptionKnowledge

Economy

InnovationExports/Imports

Imbalances

TrustSpecialization

Step 2: Identifying Strengths and WeaknessesLatvia

HighInequality

Prosperity Outcomes


HighInformality

LowManufacturing

Intermediate Indicators

Competitiveness

Step 3: Link Outcomes to Fundamental Competitiveness

19 Copyright 2011 © Christian KetelsSource: Hausmann/Rodrik, 2008

Step 4: Analyze Complementarity Across Policy Areas

e.g., Infrastructure Investment


e.g., Workforce Skills

e.g., Investment Attraction

Specific Segment of the Economy




Specth

Step 5: Define an Implementation Strategy

What to do How to get it done


• Institutional structure

• Capacity

• Consensus

• Leadership

• External environment

Clusters and Competitiveness

ClustersOther Dimensions of

Competitiveness

ENHANCE

Static

(Leverage)

Dynamic

(Upgrade)

11 33


Competitiveness

ENABLE

• Co-location of companies

and other institutions

affecting the potential for

local value creation within a

given economic field through

spillovers and linkages

• Economic fundamentals

that set the productivity

level companies can reach

within a given geographic

location

22

Clusters Enhancing CompetitivenessThe Impact on Regional Prosperity

Determinants of Regional Job Growth, Wages, and Patenting

• Specialization in strong clusters

• Breadth of position within each cluster


• Positions in related clusters

• Presence of a region‘s clusters in neighboring regions

Not significant

• Positions in “high-tech“ versus other clusters

Source: Porter/Stern/Delgado (2010), Porter (2003)

Clusters Enhancing CompetitivenessThe Impact on Entrepreneurship

Survial Ratesof New Businesses (+)

The stronger the cluster, the more

The stronger the cluster , the higher the survial rate of new businesses

CLUSTERCLUSTER


New Industries (+) New Business Formation (+)New Business Formation (+)

Job GrowthJob GrowthIn New Businesses (+)

The stronger the cluster, the more likely new industries within the cluster are to

emerge

cluster, the more dynamic is the process of new business formation

The stronger the cluster, the higher the job growth in new

businesses

Source: Porter, The Economic Performance of Regions, Regional Studies, 2003; Delgado/Porter/Stern, Clusters and Entrepreneurship, Journal of Economic Geography, 2010; Delgado/bPorter/Stern, Clusters, Convergence, and Economic Performance, mimeo., 2010.

Clusters Enhancing Competitiveness: The Case for Action

• Agglomeration largely driven by business environment conditions and ‘automatic’ cluster effects in a market process

BUT


• Exploitation of localized spill-overs not automatic

• Exploration of opportunities for joint action not automatic

• Cluster efforts enable locations to benefit more from what they have

POLICYPOLICYCompetitiveness Enabling Clusters:

Sources of Cluster Emergence

Location Existing Clusters

Business Environment


Natural Resources

Context for competition across regions

Entrepreneurs

Competitiveness Enabling ClustersCompetitiveness and the State of Cluster Development

State of Cluster Development

High


Competitiveness

Source: ISC analysis based on WEF Global Executive Opinion Survey, 2010

HighLow

Low

New Zealand

New Zealand Competitiveness Profile 2011

Macro (4)

Rule of Law(2)

Context for Strategy and Rivalry (2)

Micro (18)

Social Infra-structure and Pol.

Institutions (4)

Macroeconomic Policy (1)

Business Environment Quality

(17)

Company Sophistication

(19)

Sourc

e: U

npublis

hed d

ata

fro

m the G

lobal C

om

petitiveness R

eport

(2011),

auth

or’s a

naly

sis

.

Organizational Practices(7)


Political Institutions (5)

Human Development (8)

Demand Conditions (14)

Related and Supporting Industries (34)

Factor Input Conditions (10)

Administrat.

(2)

Skills

(8)

Innovation

(25)

ICT /Energy

(18)

Capital

(14)

Sourc

e: U

npublis

hed d

ata

fro

m the G

lobal C

om

petitiveness R

eport

(

Internationalization (12)

Strategy(23)

Logistical

(23)

Significant

advantage

Moderate

advantage

Neutral

Moderate

disadvantage

Significant

disadvantage

Clusters as Drivers of Competiveness Upgrading

Clusters as Tool

Better Actions More Impact


Better Actions More Impact

Cluster initiatives provide a

platform to discuss necessary

improvements in

competitiveness at the level

where firms compete

The organization of economic

development actions around

clusters leverages positive

spill-overs and mobilizes

private sector co-investment

What is Different about Cluster-Based Policy?

Cluster vs.Narrow

Industries

RegionalPerspective

Public-PrivateCollaboration


Build on Regional Strengths

Demand-drivenPolicy

Priorities

CompetitivenessFocus

Clusters as Drivers of Competiveness Upgrading:The Challenge

100100

60


4545

1515

All employment All employment

in clusters

All employment

in strong clustersNote: Income in light blue

Source: European Cluster Observatory, 2011

~25

Clusters as Drivers of Competiveness Upgrading:Cracking the Glass Ceiling

From a few successful

cluster islands…

…to a more

competitive economy

• Systematic use of clusters as a

delivery channel for microeconomic

policies

• Active management of regional


• Active management of regional

cluster portfolios that engage many

clusters and harness cross-cluster

linkages

• Design of feed-back mechanisms from cluster efforts to general

business environment upgrading

• Leverage cluster organizations to

enhance public private dialogue on

regional competitiveness

Clusters and Competitiveness Strategy

BusinessBusiness ClusterCluster

Positioning

• Identifies, communicates, and strengthens

the specific value proposition of the location


BusinessBusinessEnvironmentEnvironment

ClusterClusterPortfolioPortfolio

• Accelerates growth in

those fields where the

location has strengths

• Enables the emergence

of new clusters from existing clusters

• Improves the

economic platform

for all clusters and companies

Lessons for Cluster Practitioners

Public Officials

• Support clusters through competitiveness upgrading, not just money for cluster organizations

• Integrate cluster efforts into a broader competitiveness strategy

• Work with an (ever evolving) regional portfolio of clusters, not clusters in isolation


Cluster Initiative Managers

• Lobby for a more competitive business environment, not just support for collaboration inside the cluster initiative

• Offer your insights and structures as an input for broader competitiveness efforts

• Look for collaboration opportunities in your location’s overall cluster portfolio

cluster basics: competitiveness - coming to grips with a difficult term

Technology

productivity competitiveness

wages competitiveness

competitiveness ability

term competitiveness

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