Vietnam's Economic Strategy and Private Sector Role
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Vietnam's Economic Strategy and Private Sector Role
- 1. Professor Michael E. Porter Harvard Business School Ho Chi Minh, Vietnam December 1, 2008 Vietnam’s Competitiveness and the Role of the Private Sector 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: November 18, 2008, 3pm
- 4. Prosperity Performance Selected Countries PPP-adjusted GDP per Capita, 2007 Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2003-2007 Source: EIU (2008) , authors calculations Ireland USA Hungary China Taiwan Greece Pakistan Portugal Switzerland Czech Republic Slovakia Germany Finland Iceland Sweden Spain UK Netherlands Austria France Russia Saudi Arabia Turkey Thailand Chile Singapore Croatia Philippines Slovenia Bahrain Canada Italy Australia Japan Korea Mexico New Zealand Brazil India Indonesia Argentina Hong Kong Israel Malaysia South Africa Poland Romania Lithuania Latvia Estonia Colombia Vietnam Costa Rica Egypt Nigeria Bangladesh Sri Lanka Cambodia
- 5. Labor Force Utilization Participation Rates, Selected Countries Source: Economist Intelligence Unit (2008) Labor Force Participation Rate, 2007 Change in Labor Force Participation Rate, 2003-2007 France UK Finland Germany Italy Latvia Sweden Norway Lithuania Ireland South Korea Czech Rep. Singapore (6.16%) Poland Colombia Mexico Slovenia USA Pakistan Austria Morocco New Zealand Japan Hungary Romania Turkey Slovakia Australia Bulgaria Canada Spain Iceland Bangladesh Brazil Portugal Indonesia China Argentina Philippines Russia Hong Kong India Sri Lanka Nicaragua Malaysia Chile Taiwan Thailand Vietnam
- 6. Comparative Labor Productivity Selected Countries Compound annual growth rate (CAGR) of real GDP per employee (PPP-adjusted), 2003-2007 GDP per employee (PPP adjusted US$), 2007 Source: authors calculation Groningen Growth and Development Centre (2008) France UK Argentina Finland Germany Italy Poland Sweden Norway Lithuania Ireland South Korea Czech Republic Latvia Hong Kong Estonia Mexico Slovenia Austria Switzerland New Zealand Japan Hungary Belarus Turkey Malaysia Slovakia Australia China Canada Spain Singapore USA India Philippines Indonesia Russia Brazil South Africa Saudi Arabia Thailand Chile Portugal Iran Taiwan Denmark Iceland Israel Croatia Greece Venezuela Sri Lanka Ukraine Syria Yemen Cote d’Ivoire Dominican Republic Ecuador Senegal Kenya Ghana Bangladesh Cambodia Ethiopia Nigeria Pakistan Egypt Peru Tunisia Costa Rica Bulgaria Kazakhstan Colombia Vietnam
- 7. Decomposition of Vietnamese Growth Source: Ohno (2008) Contribution to Annual GDP growth (%)
- 8. Domestic Fixed Investment Rates Selected Countries Gross Fixed Investment as % of GDP (2007) Note: Includes inbound FDI Source: EIU, 2008 Change in Gross Fixed Investment (as % of GDP), 2003 - 2007 Turkey Spain Czech Republic Australia Norway Slovakia Pakistan Austria Brazil Malaysia France Germany Colombia Netherlands Poland Sweden Latvia Slovenia Hungary USA Argentina Denmark China (40.4%) Estonia UK Lithuania South Africa Philippines Russia Indonesia Ireland Singapore Korea India Iceland Thailand Italy Japan New Zealand Canada Mexico Kenya Egypt Tunisia Greece Romania Sri Lanka Kazakhstan Dominican Republic Finland Portugal Hong Kong Chile Cambodia Ukraine Venezuela Croatia Saudi Arabia Vietnam
- 9. Inbound Foreign Investment Performance Stocks and Flows, Selected Countries Source: UNCTAD, World Investment Report (2007) Inward FDI Stocks as % of GDP, Average 2003 - 2007 FDI Inflows as % of Gross Fixed Capital Formation, Average 2003 - 2007 Japan Russia Saudi Arabia Turkey Slovenia UK Hungary Slovakia Czech Republic Australia Denmark Chile Netherlands Poland USA Colombia Estonia Malaysia Thailand South Africa New Zealand Indonesia Iceland (46.7%) China Sweden Canada Lithuania India Brazil France Pakistan South Korea Austria Latvia Switzerland Spain Italy Norway Germany Mexico Portugal Finland Laos Cambodia Philippines Singapore (160.1%, 64.7%) Greece Israel Vietnam
- 11. Vietnam’s Exports By Type of Industry Source: UNComTrade, WTO (2008) World Export Market Share (current USD)
- 12. Vietnam’s Cluster Export Portfolio 2000-2006 Change in Vietnam’s world export market share, 2000 – 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 and the IMF BOP statistics. Vietnam’s world export market share, 2006 Change In Vietnam’s Overall Growth In World Export Share: 0.25% Vietnam’s Average World Export Share: 0.31% Exports of US$1.1 Billion = Footwear (5.68%, 1.91%) Plastics Textiles Apparel Fishing and Fishing Products Tobacco Coal & Briquettes Furniture 0%
- 16. Wage Level Comparison Selected Countries Monthly Minimum Wage USD, log scale, 2008 Source: Global Competitiveness Report, 2008; EuroStat, 2008; Philippines Department of Labor and Employment, 2008 Global Competitiveness Index Score, 2008 New Zealand Australia Taiwan Singapore Korea Malaysia Cambodia Philippines Indonesia Thailand China Italy Greece Slovenia Portugal Czech Republic Estonia Spain Cyprus Lithuania Austria Sweden Netherlands Denmark Ireland United Kingdom Japan / Belgium / France Germany Hungary Poland Slovakia Latvia Romania Bulgaria $0 $1,000 $3,000 $500 $100 $50 Vietnam
- 17. BCI Value, 2007 Dynamism Score, 2002 - 2007 Below average Above average Average Zambia Zimbabwe Uganda Tanzania Honduras Indonesia Sri Lanka Bolivia Mali Pakistan Nicaragua India Bangladesh Rate of Competitiveness Improvement Low Income Countries, 2002 - 2007 Paraguay El Salvador Chad Mozambique Madagascar Nigeria Gambia Ethiopia Source: Global Competitiveness Report 2007 High Low Vietnam
- 19. Macroeconomic Competitiveness Vietnam’s Position Social Infrastructure and Political Institutions Macroeconomic Policies Basic health and education + Solid provision of basic services – Increasing concerns about the quality of these public services Fiscal policy + Government budget and debt at acceptable levels – Government budget still reliant on foreign aid Monetary Policy – High levels of inflation Political institutions + High levels of political stability + Increasing decentralization of economic policy responsibilities – Little effective policy dialogue – Corruption remains a significant challenge Rule of law + Quality of laws tends to be good – Effectiveness of implementation remains weak
- 20. Governance Indicators Selected Countries 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) Worst country in the world Index of Governance Quality, 2007 Best country in the world
- 21. Corruption Perception Index, 2007 Note: Ranks only countries available in both years (91 countries total) Source: Global Corruption Report, 2007 Change in Rank, Global Corruption Report, 2007 versus 2001 Rank in Global Corruption Index, 2007 91 1 Improving Deteriorating High corruption Low corruption Finland Canada Bangladesh Indonesia Ireland Portugal Egypt Iceland Czech Republic Slovakia South Korea Latvia India Slovenia Thailand Switzerland France Romania Turkey Estonia Austria Germany Japan China Norway UK Malaysia Lithuania Colombia Hungary Taiwan Spain Hong Kong Chile United States South Africa Mexico Croatia Italy Poland Brazil Argentina Israel Venezuela Russia Uruguay New Zealand Sweden Tunisia Peru Tanzania Uganda Senegal Philippines Zimbabwe Cote d’Ivoire Nigeria Pakistan Greece Jordan Ukraine Panama Vietnam
- 28. State of Cluster Development Tourism Cluster in Cairns, Australia Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden Hotels Attractions and Activities e.g., theme parks, casinos, sports Airlines, Cruise Ships Travel agents Tour operators Restaurants Property Services Maintenance Services Government agencies e.g. Australian Tourism Commission, Great Barrier Reef Authority Educational Institutions e.g. James Cook University, Cairns College of TAFE Industry Groups e.g. Queensland Tourism Industry Council Food Suppliers Public Relations & Market Research Services Local retail, health care, and other services Souvenirs, Duty Free Banks, Foreign Exchange Local Transportation
- 29. Vietnam’s Cluster Export Portfolio 2000-2006 Change in Vietnam’s world export market share, 2000 – 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 and the IMF BOP statistics. Vietnam’s world export market share, 2006 Change In Vietnam’s Overall Growth In World Export Share: 0.25% Vietnam’s Average World Export Share: 0.31% Exports of US$1.1 Billion = Footwear (5.68%, 1.91%) Plastics Textiles Apparel Fishing and Fishing Products Tobacco Coal & Briquettes Furniture 0%
- 30. Vietnam’s Cluster Export Portfolio cont’d 2000-2006 Change in Vietnam’s world export market share, 2000 – 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 and the IMF BOP statistics. Vietnam’s world export market share, 2006 Automotive Production Technology Motor Driven Products Information Technology Textiles Prefabricated Enclosures and Structures Leather and Related Products Analytical Instruments Jewelry, Precious Metals and Collectibles Communications Equipment Oil & Gas Agricultural Products Biopharmaceuticals Processed Foods Chemical Products Forest Products Total Services Power and Power Generation Equipment Construction Materials Lighting and Electrical Equipment Medical Devices Publishing and Printing Metal Mining and Manufacturing Entertainment Building Fixtures and Equipment Sporting, Recreational and Children's Goods Exports of US$1.1 Billion = Change In Vietnam’s Overall Growth in World Export Share: 0.25% Vietnam’s Average World Export Share: 0.31%
- 31. Furniture Building Fixtures, Equipment & Services Fishing & Fishing Products Hospitality & Tourism Agricultural Products Transportation & Logistics Share of World Exports by Cluster Vietnam, 2000 Plastics Oil & Gas Chemical Products Biopharma- ceuticals Power Generation Aerospace Vehicles & Defense Lightning & Electrical Equipment Financial Services Publishing & Printing Entertainment Information Tech. Communi- cations Equipment Business Services Distribution Services Forest Products Heavy Construction Services Construction Materials Prefabricated Enclosures Apparel Leather & Related Products Jewelry & Precious Metals Textiles Footwear Processed Food Tobacco Medical Devices Analytical Instruments Education & Knowledge Creation Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions. Marine Equipment Aerospace Engines Heavy Machinery Sporting & Recreation Goods Automotive Production Technology Motor Driven Products Metal Manufacturing < 0.07% 0.07 – 0.15% 0.16 – 0.31% 0.31 – 0.62% 0.62- 1.24% Not reported > 1.24%
- 32. Furniture Building Fixtures, Equipment & Services Fishing & Fishing Products Hospitality & Tourism Agricultural Products Transportation & Logistics Share of World Exports by Cluster Vietnam, 2006 Plastics Oil & Gas Chemical Products Biopharma- ceuticals Power Generation Aerospace Vehicles & Defense Lightning & Electrical Equipment Financial Services Publishing & Printing Entertainment Information Tech. Communi- cations Equipment Business Services Distribution Services Forest Products Heavy Construction Services Construction Materials Prefabricated Enclosures Apparel Leather & Related Products Jewelry & Precious Metals Textiles Footwear Processed Food Tobacco Medical Devices Analytical Instruments Education & Knowledge Creation Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions. Marine Equipment Aerospace Engines Heavy Machinery Sporting & Recreation Goods Automotive Production Technology Motor Driven Products Metal Manufacturing < 0.07% 0.07 – 0.15% 0.16 – 0.31% 0.31 – 0.62% 0.62- 1.24% Not reported > 1.24%
- 34. Specialization of Regional Economies Selected U.S. Geographic Areas Boston Analytical Instruments Education and Knowledge Creation Communications Equipment Los Angeles Area Apparel Building Fixtures, Equipment and Services Entertainment Chicago Communications Equipment Processed Food Heavy Machinery Denver, CO Leather and Sporting Goods Oil and Gas Aerospace Vehicles and Defense San Diego Leather and Sporting Goods Power Generation Education and Knowledge Creation San Francisco- Oakland-San Jose Bay Area Communications Equipment Agricultural Products Information Technology Seattle-Bellevue-Everett, WA Aerospace Vehicles and Defense Fishing and Fishing Products Analytical Instruments Houston Oil and Gas Products and Services Chemical Products Heavy Construction Services Pittsburgh, PA Construction Materials Metal Manufacturing Education and Knowledge Creation Atlanta, GA Construction Materials Transportation and Logistics Business Services Raleigh-Durham, NC Communications Equipment Information Technology Education and Knowledge Creation Wichita, KS Aerospace Vehicles and Defense Heavy Machinery Oil and Gas 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.
- 35. Vietnam Provincial Competitiveness Index, 2006 Excellent High Performing Mid-high Average Mid-low Low Performing Source: Vietnam Provincial Competitiveness Index 2006 (USAID)
- 49. Turn Niche Products Into Clusters Develop Related Clusters Clusters and Economic Diversification Deepen Existing Clusters Build Clusters Around MNCs Upgrade Existing Export Products and Services
- 50. Upgrading Vietnamese Niche Positions, 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.
Notes de l'éditeur
- Does your organization have a strategy? Non-profit Government department Company Pressures: financial markets / investors Opportunity: global economy Bigger and bigger Many companies are confused about strategy Strategic mistakes come from inside, not changes in external environment
- Dramatic differences across countries Many very smart people have declared the end geography, yet there exists dramatic differences across countries On the vertical axis, you have a typical measurement of prosperity (adjusted for PPP) Horizontal axis an indication of how fast countries are growing. If we look at the same chart within a country we see similar patters playing out at the state/regional level Even with the same language, culture, laws, currency, etc. -> some regions do better than others Within countries, location matters and plays a role in shaping competitiveness What explains this? How to reconcile this? How do we take play to this in our field? Location must matter with prosperity Good for developing economies Tremendous differences, so the fundamental question is: why? What are the implications for policy? See tremendous differences Like see shift to left Say “location doesn’t matter” yet a big difference
- Vietnam had 7%-points increase in the share of employees in population between 1995 and 2005 Out of these 7%-points, 6%-points were due to an increase of the share of population in working age The share of population in working age will continue to increase until 2020 with a total additional increase of a further 5%-points After 2020, the share will decrease
- Notice that the countries are in similar positions to those in the Prosperity Performance slide This is no coincidence, and reinforces the importance of productivity Productivity gains come from different sources Shift from lower to higher productivity sectors Gains in market share by higher productivity companies (including through entry/exit) Changes in productivity within companies Labor productivity growth has accelerated until 2006; no more recent data available
- capital deepening has been the primary driver
- - This includes FDI inflows Increasing amount of investment (including inward FDI) is going into real estate projects with questionable impact on the productive capacity of the Vietnamese economy Country had been experiencing the normal problems of an overheating economy already in the first half of 2008, i.e. high and rising inflation and high GDP growth The concerns about the sustainability of growth - increasingly pushed up by rising real estate prices and speculation on the financial markets – led to pressure on the currency The government reacted by rising interest rates which led to a massive drop on the stock exchange The monetary policy intervention had a dampening effect on inflation The slowing global economy, too, has reduced pressure and so the overheating has been reduced without a collapse of growth rats
- http://www.unctad.org/Templates/Page.asp?intItemID=3277&lang=1 Increasing gap between committed and actually made investments Increasing share of investment goes towards real estate and infrastructure projects, where regulatory burden and other factors than delay the implementation Recent fast growth of announced FDI is a reaction of signal by central government to provinces to raise FDI inflows; this was in reaction to a concern that capital inflows were going to be too low to match the increasing trade deficit Provinces have than started a hectic search for whatever FDI seemed available; with no strategy to look for investments that would benefit the local economy in terms of skills and strengthening the cluster – this is also a reason why real estate (which is easy) inflows have grown so much
- Oil (in both unprocessed and semi-processed forms) is big drivers of growth Oil price increases have been an important factor (positive terms-of-trade changes); now prices are down to a third or less relative to the same time last year Still dominated by unprocessed goods Even processed goods tend to have low value-added and are not very sophisticated. i.e. wires are the main export in electronics (could change once the Intel plant gets operational – at that plant, there are huge problems findings sufficient numbers of skilled employees)
- What we know is that prosperity comes from production Lots of work produces lots goods. It is important in order to sustain high wages Productivity = high return on invested capital Productivity drives wages, wealth and income determines prosperity Depends on both domestic and foreign firms (though who owns the firms is not important, but rather where the most sophisticated operations are located) Jobs competitiveness (the only way) Without business there is no prosperity Companies need to seek out the best way to use human/natural resources Countries used to depend on endowments which led to wealth Endowments are now easy to get (you can simply import it) What is scare is the ability to create an environment which allows companies to be highly productive More that companies can move/goods/services/resources easily The greater the value of knowledge, skills, production techniques. If you don’t have this…you won’t be wealthy Productivity is a function of how high you can charge prices (which is itself a function of quality, uniqueness and innovation) It is about raising the value per unit of the nation’s resources Important to remember that it doesn’t matter what activities a country does…but how it does it Make shoes, semi-conductors…not what you do, just how it’s done Good example is the Italians, who are able to sell $500 shoes (based on quality, designer cache) Another example is California or Holland, where an enormous amount of wealth is created through agriculture sector A bad example is France, which tried to force a high-tech sector to be built (through subsidies) – thinking that would lead to high-paying jobs Countries get rich by creating world class sectors that are more productive than in other countries, in order to attract their share of investment/business activity (didn’t matter in the past, because of trade barriers) Countries must now compete to provide the most productive location, and support high standards of living The idea that some industries are good/bad is not the right thinking There is a fallacy that countries must be in high-tech to compete Foreign firms help create the environment, technical base, and expertise Protecting local industries is usually a failing strategy Countries should encourage foreign firms to come into sectors where there is real domestic strength This goes against development thinking Countries should create environment where best firms want to be in that location (e.g., every life science firm in Massachusetts) The game is who can offer the most productive environment. Both at the industry level and across the entire economy Labour cost isn’t the point. It’s about the total productivity of the system Economies of scale are overrated. Mostly about eliminating competition
- Vietnam has solid endowments at the bottom: Oil and gas reserves in the coastal areas High agricultural potential (coffee, rice, …) Large coastline close to significant transport routes Between strong growth areas in southern China and ASEAN Set context for competitiveness Legal, social, macro, institutional rules, political system Need these elements to be productive – stability allows for businesses to be confident to invest & do business It is a necessary, but not sufficient condition What makes nations/locations competitive Need economic stability, to ensure macroeconomic cycles are well managed Need political stability, a trusted legal framework Social variable is important Prosperity is created in the micro economy, not macro Only actor that can create wealth is the firm (when producing a profit through the act of buying and selling) Profit is created through the design, development and sale of a product at profit (the profit creates wealth) Government can harvest & distribute wealth, but can’t produce it When look at country/region, look at the balance of business environment against the level of business sophistication Business environment needs a stable macroeconomic environment in order to reach full potential Question is making macroeconomic environment harder or easier to create wealth Codependency is often misunderstood What happens if it takes 3 days to get through customs 12 hours to drive across city? Microeconomic conditions How sophisticated are companies Good practices (operational) Good organizational structure? Strategy? Need good business environment (skills, infrastructure, etc.) Natural resources, Per capita unprocessed natural resource intensive goods exports Location , endowments are given by their very nature % Land area within 100 km of ice-free coast/navigable river Endowments enable countries to generate income (“inherited prosperity”) Endowments per se do not make a country more or less competitive, but can indirectly impact microeconomic or macroeconomic competitiveness Find they affect prosperity, though few places can achieve prosperity based solely on endowments (e.g., lots of oil can create prosperity, but even for Saudi Arabia needs something more) Macro-competitiveness Need stable macro policies (e.g., low inflation, stable deficits,), functioning social and political institutions (e.g., government, legal, political institutions, low corruption, etc.) Creates the environment to use endowments effectively In developing countries, this is critical constraint (e.g., Nigeria has a big problem here, despite good endowments) Micro-competitiveness Rooted in firms and business environment in which firms compete Only firms create wealth (government can harvest wealth) Create wealth when selling product at a profit. Unless firms are capable of creating wealth, country cannot become prosperous In order to be productive, firms need high quality business environment Need highly skilled people for high-skill strategy Need good border infrastructure to maintain supply chain Cluster is a collection of firms that allows them to become more productive Endowment is the base, but need other “layers” in place Development policy needs to focus on the top layer, where wealth is generated Vietnam’s Endowments Oil and Gas reserves in the costal areas Agricultural potential Large coastline close to significant transport routes
- EU Wage data: http://livingingreece.gr/2008/04/04/minimum-monthly-salaries-of-eu-countries/ (figures were given in Euros, converted at rate of 1 Euro = 1.3 USD Asian Wage Data: http://www.nwpc.dole.gov.ph/pages/statistics/Asean%20Wages%202008.pdf Still quite low (below Chinese) but rising Key reason for why FDI comes, according to survey data http://www.thanhniennews.com/features/?catid=10&newsid=24528 A majority of Korean companies are happy to operate in Vietnam thanks to a combination of tax benefits and a cheap but highly productive work force, a recent survey showed. Some 93 percent of 217 Korean-invested companies in Vietnam said that they are highly satisfied with their local operations, the survey by the Korea Trade-Investment Promotion Agency (KOTRA) said.About 70 percent said they would encourage other Korean companies to invest in the emerging market.KOTRA conducted the survey Nov.-Dec. last year to assess Korean business performance, and disclosed the results on Monday.Among the strongest points of doing business in Vietnam were the lost cost of labor, cited by 60 percent of the surveyees; high productivity, cited by 15 percent; and tax breaks, cited by 6 percent.Support from the Vietnamese government was cited by 3 percent.
- Overall, Vietnam has been losing position on competitiveness in recent years relative to peers Not getting better
- Overall quite good relative to peers Strengths in political stability, to a smaller degree also regulatory quality and rule of law Weaknesses in voice & accountability and corruption – note that there is a relationship between the two Recent story on journalists that went to jail because they exposed corruption at senior levels How do you rank up against peer countries? SEPI MACRO Strengths Strenghts Basic Education and health in place Government budget Public Debt Weaknesses Weaknesses Corruption is a major barrier to improving Macroeconomic policy institutions Competitiveness Inflation control
- Areas that clearly needs to be addressed
- Everything matters for competitiveness Critical to understand the interactions among these elements Economic growth happens as a gradual improvement in those elements of the diamond that create the strongest barriers to higher productivity at a specific moment in time Critical to use this framework to priorities what needs to happen in Russia now; there are no generic silver bullets Presupposes many functioning public institutions (implementation agencies, regulatory agencies) FACTOR INPUTS : need right inputs to be competitive or better access to these inputs Can’t be productive unless you’ve got high quality inputs at high cost Capital needs to be packaged in a way that fits the needs of businesses (not all capital is the same) Need physical infrastructure. Need permitting/register The question is how do these inputs compare to other locations? CONTEXT : rules of the game Incentives for investment, tax paying, competition, innovation protection Monopolies are not good competitive policy There is only one way to succeed, to be productive (the tighter the links, the better the country) Rivalry is important it makes sure that competition is vibrant If you don’t have to compete at home, then you’ll be bad at succeeding abroad DEMAND : Competitiveness of location can be based on the sophistication of local demand If you have sophisticated/demanding customers, this is a big advantage/asset They will teach companies how to be good/productive, who can then export expertise to other markets However, need to know who they are and target them e.g., demand conditions in the US for software make this industry productive Some demand is set by regulations (e.g., environmental, energy use, etc.) SUPPLIERS : Relevance of clusters cannot be overstated Want to build up suppliers that are in close proximity (why import from 5,000 miles when you can buy it from across town) e.g., Toyota manufacturing process
- Communication infrastructure A number of SOEs have entered the telecommunications markets, even some (like the national electricity company) that were not originally in this area As a consequence, prices have dropped and service improved markedly Competition is intense but largely price-based --------------------------------------------------------------------------------------------------- Issue on SOE is (a) slow privatization due to concerns about the process (later in the presentation more on this) and (b) SOEs have easier access to capital which gives them a distinct advantage, especially now that interest rates are high and capital access is limited Trade barriers should drop over time after WTO accession
- Note that imports used in the production of export goods are exempted from tariffs; these are the rules in the multiple industrial parks around the country. Hence most FDI plants do not pay import tariffs for the imported parts and machinery http://www.heritage.org/research/features/index/index.cfm Trade restrictions can take the form of taxes on imports and exports (known as tariffs), quotas or outright bans on trade, and regulatory barriers. The degree to which government hinders access to and the free flow of foreign commerce can have a direct bearing on the ability of individuals to pursue their economic goals. Tariffs increase the prices that local consumers pay for foreign imports, and these price distortions change incentives, often pulling producers away from specializing in some goods and toward the blocked goods. By interfering with comparative advantage, trade restrictions impede economic growth. Also, tariffs make local citizens poorer by raising prices. In many cases, trade limitations put advanced-technology products and services beyond the reach of local people, limiting their own productive development. Methodology. The trade freedom score is based two inputs: The trade-weighted average tariff rate and Non-tariff barriers (NTBs). Different imports entering a country can, and often do, face different tariffs. The weighted average tariff uses weights for each tariff based on the share of imports for each good. This is calculated by dividing the country’s total tariff revenue by the total value of imports.
- Energy issues related to full reliance on hydro power, which is good for low cost base electricity needs but not for peak demand; investments in other electricity plants has been very slow in implementation Financial markets have been openend up but with too little regulatory framework; there was much speculation from many unsophisticated players but little sustainable improvement in access to investment capital for private companies. After the crash of the equity markets the sector is now moving to consolidation Innovation infrastructure unsurprisingly low; weaknesses not only on advanced research but also more generally in the education system Logistical infrastructure might surpirse them given the significant investments made; clearly the money was not spend effectively but rather spread out too thinly across the provinces. Also a fast rising demand from the growing economy that is not met
- Significant heterogeneity across different areas of business regulation Note that inefficient regulations in these areas are like a self-imposed cost that can relatively easily be removed While registering property looks ok, there are still huge problems with private land ownership titles in rural regions. The state owns all lands and getting usage rights is complex, often involving corrupution
- Main impact of clusters: productivity, innovation, new firm creation In line with changes in management and innovation practice Outsourcing/core competencies drive reliance on other companies “ Open innovation” drives reliance on network of companies and research institutions to drive innovation Cluster is a set of related industries and industries that are co-located within the same region Entities (companies) are not isolated and randomly located The Cairn’s tourism cluster is built around the great barrier reef Had to start with an attractive attraction However, not just the quality of attractions success is based on many industries/sector/institutions interacting and supporting each other E.g., suppose you have best hotel in the world But need to wait at airport for 5 hours But taxi driver is rude and overcharges customers No good restaurants in the area, and those that are, are prone to food poisoning Trash all over the beach No good entertainment/music/theater in the surrounding area The success of the hotel is dependent upon a group of other organizations doing there job well Success of a cluster is about the co-dependency of related industries, all doing their jobs well Rarely is individual firm competitive … it is clusters that are competitive Couldn’t’ a firm simply import everything it needs? But is that being very productive? This leads to a paradox of the global economy: Anything you can source from a distance is no longer a competitive advantage (b/c so can everyone else!!) Should strive to outsource locally .. this reinforces and strengthens the local structure Added benefit that there are positive externalities (e.g., building up capacity, expertise, skills, etc..) Co-location of competing firms also helps brings in talent, skills, etc. At the same time, distance doesn’t matter as much
- NOTE: the following clusters are either not included (Coal and Briquettes) or included (Marine Equipment, Education & Knowledge Creation) because this map is based on the US cluster employment relationships, rather than on world export cluster relationships.
- NOTE: the following clusters are either not included (Coal and Briquettes) or included (Marine Equipment, Education & Knowledge Creation) because this map is based on the US cluster employment relationships, rather than on world export cluster relationships.
- Regions compete and regional business environments are shaped by policies at different geographic levels While the focus has traditionally been on the national level, neighboring countries and sub-national regions provide crucial leverage points
- We often see differences across regions (within the same country) Each MSA is different economy Boston is not NYC is not N. Carolina See tremendous specialization across the United States, which is healthy It’s less 1 economy, than 75-80 specialized economies Specialization of internal economy is the secret weapon of the United States Sign that cluster development is working While the united States doesn’t trade much with the world (as % of GDP), there are massive exports within the US. Build up clusters regionally within country Differences in business environment Most of what matters is not national Mostly regional/local Where are the best suppliers, skills, institutions, universities, etc. Factors vary dramatically at local level What really matters is regions especially in large countries (China / India) Specialize in different things Boundaries cities/town economically irrelevant National factor limited in importance
- www.pcivietnam.org/download_file.php?file=1159774878_Summary%20Report%202006.pdf&uploadname=rep The Provincial Competitiveness Index (PCI) is an effort to explain why some parts of the country perform better than others in terms of private sector dynamism and growth. Using survey data from businesses that describe their perceptions of the local business environment, as well as credible and comparable data from official and other sources regarding local conditions, the PCI rates provinces on a 100-point scale. In 2006, the PCI is composed of ten sub-indices that capture key dimensions of the local business environment that can be directly influenced by the actions and attitudes of provincial officials: Entry Costs (Business Establishment Costs) Land Access and Security of Tenure Transparency and Access to Information Time Costs of Regulatory Compliance Informal Charges State-Sector Bias (Competition Environment) Pro-activity of Provincial Leadership Private Sector Development Services Labor Training Legal Institutions
- Neighborhood matters In the United States, it would be adjoining states Natural economic interconnections are with neighbors
- At the moment, this is not a key priority for Vietnam But it will grow in importance, once Vietnam has made more progress on its domestic competitiveness agenda
- As we look at how diamonds and clusters developing, we see them competing on factors, to on efficiency and investment, to innovation. At each stage there are different policy priorities Factor; stability, infrastructure, less costly Investment: education, investment, rules & incentives Important theme to get a consistent medium-term vision is the identification of the stage of competitive development the economy is in This will set broad priorities in terms of policy areas to address It will also give a sense to companies on what dimensions they can successfully compete on in the future
- Much of the financial sector opening stipulated under the WTO will happen only in 2011/12 (although there is already some presence by foreign companies now). Vietnam could unilaterally open up earlier but given the crisis there is currently little motivation to do so
- Many laws and regulations in Vietnam are formally quite good but their implementation is lacking The formal good quality of the laws is also a result of the almost too strong willingness to copy from others; advisors from USAID were, for exampled, asked to write the laws. This creates little ownership in Vietnam which hampers implementation It also leads to laws that might not be sufficiently adjusted to the Vietnamese context and capabilities (I heard something along the same lines about companies that copy foreign approaches without thinking through the need of modifying them to work in Vietnam) There is also still much room to improve regulation; the rankings on regulation in the World Bank’s Doing Business and Governance assessments are average at best
- Industrials parks; much of the FDI happens in industrial zones with dedicated infrastructure and tax advantages. But out of the 150 industrial parks across the country only 50-60 do well – clear cluster focus in line with specific regional advantages would help Relation between performance of an industrial park and business environment: “high tech” park in HCMC works very well while the same park in Hanoi has been struggling We could also add a point here on cluster-based research institutions for technology transfer and adoption. Maybe also add a point on cluster-oriented regulatory agencies.
- Cluster policy is crucial for Vietnam to make any headway towards the first stages of innovation, i.e. assimilation and modification of foreign knowledge Principles of Cluster Policy Neutral across clusters Enhancing productivity of multiple firms/institutions (cluster strengthening) Facilitating/capturing linkages and externalities Facilitating the flow of information/knowledge across actors Engaging the private sector , not just government Preserving and enhancing market competition , not retarding it Other countries jumped ahead on this approach
- Kazakhstan’s top 25 export industries, by world export share.
- Who does this? Model has shifted from top-down govt to collaborative. The reason we teach this course at harvard at the university level is we want students from all disciplines to be in the class because that’s what ec dev is all about. We try to get you to do that. Model of economic policy has to reflect the focus of policy (macro – micro) As microeconomic foundations become more important, the policy approach needs to shift to more collaboration between private and public Government has no way to understand the specific microeconomic barriers the companies face Government does not control all elements of the microeconomic business environment
- Here you could note the useful role played by the Vietnam Provincial Competitiveness Index prepared annually by USAID
- The central and provincial governments should establish a competitiveness institute to train government leaders in competitiveness concepts, synthesize data, and broaden the program (the Fulbright Institute in HCMC is moving towards doing this; we are in discussions with them about becoming an MOC partner which they aim for in 2009/2010) Vietnam has many plans (partly a legacy of the Socialist era) but implementation is almost always an issue. Therefore it is important that strategic planning is a process from design to implementation, not just a document
- To have successful econ strategy, have to define the national value proposition. If you think about singapore, it’s clear—great platform for comp to do business. Now trying to change that, enhance it. Ireland has a good case. US is about entrepreneurship and innovation. This value prop requires certain strengths. For singapore, it was infrastructure. Which areas of the environment are truly strategic. Everything matters, but can’t do everything at once. Where do I need to maintain parity with peers versus develop unique strengths? What’s most important for a country at a particular moment? What is the value proposition of the country or region. What is distinctive or unique? Clear that everything matters Schools, roads, clusters, ports, trucking, telephones, etc. All affect productivity So tremendous agenda Need to improve much over time Sense of strategy What is important now at this stage What is unique value proposition of this location? What role is it going to play? What strengths? Where to invest to become leaders in a particular area…
- What roles do firms play? Managers have stake in the business environment should take advantage of being part of good cluster must participate actively in the region (e.g., ensure good working industry associations) Central role of collaboration Importance of partners
- There are a widening range of issues for which companies are being held responsible Community expectations continue to rise There are new government regulations and reporting requirements Activists are more sophisticated at using the media to advance their agendas These rankings can have a meaningful impact on customers, investors and potential partners, despite sometimes questionable methodologies Legitimacy of capitalism / globalization Financial crisis will accentuate Methodologies questionable Rankings are a trap Wrong measures Lack of focus Checklist Need for a new agenda, which deals with all the pressures from society Growing pressures for a “social agenda” There exist many rankings and the pressure to conform to these rankings continues to grow Many companies see this as a distraction Important to think critically about social responsibility No company can deal with all the social issues that exist, nor can they make everyone happy The challenge is to select areas where the company can link together with society and create “shared value”
- How to add value? Strategy and society vs. Openness to outside Join these two values together Different for every firm and location Inevitable link Business is a convenient target Inevitable involvement Business can be greatly effective Two-way street Business can’t do everything Have to change mindset traditional view is that economic ≠ social objectives Idea that they are in conflict is particularly strong in developing countries Bad mistake, have to start thinking differently about how they are interconnected Can’t have healthy company without a healthy country / community Conditions need to work towards promoting productivity Firms can’t be successful in the medium/long-term if they ignore social impact Success depends on healthy community – indeed, healthier community can lead to greater demand for their products Society can’t be successful without competitive/productive companies to provide jobs, wages, which are constantly strive to improve standards of living There is no country in the world that is successful without competitive economy Catastrophe is coming for countries focusing solely on social issues Only businesses can create jobs and wealth Principle of shared value should guide CSR Business priorities create shared benefit for society and business At the very least business activity should benefit and not harm Figuring out where the overlap exists is the challenge Different for each firm based on its corporate activities and geographic location (the community it operates within)
- Connect CSR to the business Where are points of intersection: positive sum Vs. focus on friction Looking for the overlap Not the most worthy causes (trap) We must see/understand that businesses can’t do everything Managers must think about the set of issues where the firm can achieve the greatest social benefit Don’t fall into the trap about trying to determine what is the most worthy cause Many, many activities are worthy causes You’ll want (have?) to do everything, spreading resources too thinly and diluting potential impact In principle, businesses should not work on social unless it can bring more than money (e.g., other assets) into play Simply giving money fails to use corporate strenghts Be aware of how you can use business expertise / assets to add value beyond simply giving money. Challenge is to figure out what these areas are: many companies do a bad job at this Not just about PR, but about creating social value
- The relationship between activities and social issues can be subtle , evolving , and hard to anticipate Impacts vary greatly in their scope across businesses, e.g., Unique to a company Unique to an industry or cluster Every part of the value chain has an impact on social issues e.g., procurement: supplier practices, child labor Marketing: truthful advertising, pricing practices HR: hiring, discrimination, health care Take an inventory of the firm’s value chain impact on social issues Don’t let outside checklist determine which issues define agenda Understand how the firms business impacts its environment Very few companies do this systematically and therefore miss out on the opportunity to create shared value Identify those that are really significant E.g., using lots of water, disposing hazardous products/waste, road safety, etc. Identify all the impacts and then focus on the most important ones. To make corporate philanthropy sustainable, you need to create widespread support within the company – a corporate-wide and community-wide mission Examples: steel company, electronics company
- Competitive advantage (or disadvantage) resides partly in the locations at which a company’s business units are based These are outside-in impacts which depend on the external business environment When we look at business environment, many aspects which have social dimension Cluster participation is an important contributor to competitiveness External circumstances affect company strategic and operational choices There will be aspects of the social environment that are central (e.g., HR, demand, rules/competition) which differ for each firm Things that affect company and that it can affect are different across businesses Must focus on own firms priorities. External circumstances affect the company’s ability to implement these choices Competitive context has always been important to competition and strategy It has become ever more important as competition among locations has increased and broadened considerably It has become even more important as the basis of competition has moved from low input costs to superior productivity Modern knowledge- and technology-based competition hinges more and more on worker skills and capabilities Companies depend more on outsourcing and collaboration with local suppliers Companies depend more on local universities and research institutions in technology development Pressures to shorten time to market makes companies’ ability to navigate local regulations and to reduce approval times for new products and projects increasingly important Companies draw more on insights from and collaboration with local customers in product and service innovation Companies’ success has become more intertwined with local institutions and other contextual conditions With globalization, competitive context is important for a company not only in its home market but in multiple countries in which it operates
- The closer the social issues to the business, the greater the opportunity to leverage the firm’s resources – and benefit society It is important to be a good corporate citizen, so you should deal with generic issues Make sure that the firm has no negative impact (that is responsive) Strategic side looks at where the value chain impact is substantial
- Motivates employees ChoicePoint’s philanthropic mission is different from conventional corporate giving programs. Alignment with its founding principles: Creating a safer and more secure society through the responsible use of information Greatest capacity to benefit society lies in the information and technological skills that ChoicePoint is uniquely qualified to provide Seek out opportunities to impact society through technology and powerful data e.g., Ensuring volunteers who work with children are safe to helping locate missing children Focusing on non-profit organizations who serve vulnerable populations. supply tools and resources that reduce risk and protect clients with the goal of a safer, more secure society Launched VolunteerSelect, which provides qualified nonprofits with affordable access to comprehensive public record and proprietary databases for the screening of volunteers and employees Donates millions of dollars in free/deeply discounted background screening services to nonprofits Provided technology to assure that Katrina refugees were resettled into host communities smoothly and safely. Verification identification services were provided to evacuees so that they could quickly receive benefits. Relief workers found hospitals, shelters and food supplies using specialized data and mapping services ChoiePoint works with two big NGOs: 1) The National Center for Missing & Exploited Children; and 2) financial support and assistance to the NGO: Identify Theft Resource Center (committed $1 million over 4 years in 2005)
- Milk production has increased fifty fold and the death rate of calves has dropped by three quarters Able to pay higher prices Ninety percent of the homes have electricity and nearly all have telephones All villages have primary schools, and many have secondary schools Moga has five times the number of doctors as its neighboring regions Nestlé now has competitors in the Moga cluster Nestlé went beyond what was necessary in the near term No contributions to charity or NGOs In this case, the lines between CSR, strategy, and business operations blur
- Business is being attacked In business, we are feeling embarrassed about what we do; and there is no reason for this Current era where finding problems, greed, mistakes in businesses has put firms on the defensive NGOs make mistakes as well We have allowed ourselves to be drawn into this negative characteristic Business has fundamentally positive impact on society (creates healthy economy and jobs) We shouldn’t be embarrassed, without businesses everyone would be poor This argument needs to be made in a polite way Businesses have the tools and effectiveness to have a huge impact on all social issues Firm must be strategic and focused when it picks the areas in which to make an impact Firms make progress because they are measured PR model will make it work But treating CSR as PR, trying to tackle every issue, giving to everyone We simply reinforce the negative dialogue Strategic appeasement is not good corporate practice, and most firms (especially those operating in developing countries) have to change their mindset Can make the next 10 / 20 years much more constructive Strategic CSR is only way to truly replace the image and reputation of business