Competitiveness Creating A Mongolian Economic Strategy

Competitiveness: Creating a Mongolian Economic Strategy
Professor Michael E. Porter Institute for Strategy and Competitiveness Harvard Business School July, 2008
This presentation draws on ideas from Professor Porters articles and books, in particular, The Competitive Advantage of Nations (The Free Press, 1990), Building the Microeconomic Foundations of Competitiveness, in The Global Competitiveness Report 2006 (World Economic Forum, 2006), Clusters and the New Competitive Agenda for Companies and Governments in On Competition (Harvard Business School Press, 1998), and ongoing research on clusters and competitiveness. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise - without the permission of Michael E. Porter. Further information on Professor Porters work and the Institute for Strategy and Competitiveness is available at www.isc.hbs.edu Version: July 21, 2008, 4pm
GCR South Africa 062007.ppt
Copyright 2007 Professor Michael E. Porter
Prosperity Performance
PPP-adjusted GDP per Capita, 2007
Selected Middle- and Lower-Income Countries
$28,000
United Arab Emirates Slovenia South Korea Estonia Hungary Slovakia Lithuania Libya Poland Botswana Croatia Chile Russia Latvia
$24,000
Saudi Arabia Portugal Cyprus Oman
Czech Republic
$20,000
$16,000
$12,000
$8,000
$4,000
$0 -3.0%
Argentina Malaysia Mexico Venezuela Romania Uruguay Costa Rica Kazakhstan Iran South Africa Brazil Dominican Republic Azerbaijan (14.9%) Turkey Belize Thailand Ecuador Algeria Tunisia Ukraine Colombia Egypt Turkmenistan China Syria Jordan Sri Lanka Georgia Indonesia Papua New Guinea El Salvador Philippines Mongolia India Pakistan Laos Senegal Vietnam Cote dIvoire Nigeria Kyrgyz Rep. Cambodia Kenya Togo Madagascar Ghana Bangladesh Uzbekistan Rwanda
-1.5%
0.0%
1.5%
3.0%
4.5%
6.0%
7.5%
9.0%
Growth of Real GDP per Capita (PPP-adjusted), CAGR, 1998-2007

Source: EIU (2008), authors calculations. Mongolia data for 1998-2006, from World Development Indicators
Competitiveness Master - 2008-05-22.ppt
Mongolias Competitive Position in 2008

Mongolia has experienced fast GDP growth since 2000, reaping the benefits of earlier reforms and benevolent external conditions However Growth is narrowly based on few sectors of the economy and driven by external factors, i.e. world prices of natural resource The macroeconomic challenges of fast growth are not under control with inflation at high and rising levels Political pressure to move focus from economic reforms towards the distribution of windfall gains from exports
Mongolia needs a new focus on upgrading competitiveness

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) that a country can sustain 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
Sources of Prosperity
Inherited Inherited Prosperity Prosperity
Prosperity Prosperity is is derived derived from from selling selling or or exploiting exploiting inherited inherited natural natural resources resources Prosperity Prosperity is is constrained constrained
Created Created Prosperity Prosperity

Prosperity Prosperity is is derived derived from from creating creating more more and and more more valuable valuable products products and and services services with with rising rising efficiency efficiency Prosperity Prosperity is is unlimited unlimited
Government Government is is the the central central actor actor in in the the economy economy as as the the owner owner and and distributor distributor of of resource resource wealth wealth Resource Resource revenues revenues allow allow unproductive unproductive policies policies and and practices practices to to persist persist Governments Governments role role gravitates gravitates towards towards the the distribution distribution of of wealth wealth as as interest interest groups groups seek seek a a bigger bigger share share of of the the pie pie
Companies Companies are are the the central central actors actors in in the the economy economy Prosperity Prosperity can can only only be be created created by by firms firms
Governments Governments role role is is to to create create the the enabling enabling conditions conditions for for productivity productivity and and foster foster private private sector sector development development
Mongolias Export Share Trends

World Export Market Share (current USD)
0.08% 0.07% 0.06% 0.05% 0.04% 0.03% 0.02% 0.01% 0.00% 1996
Source: WTO (2008)
Processed Goods Semi-processed Goods Unprocessed Goods Services TOTAL
1998
2000
6
2002
2004
2006
Inward Foreign Investment Flows

Mongolia, 1991 - 2006
Inward FDI (USD, millions)
$200 $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 1991
Note: Data not available for 1994. Source: UNCTAD (2007)
GCR South Africa 062007.ppt
1994
1997
7
2000
2003
2006
Foreign Direct Investment

By Industry Destination, 2006
Source: Annual Report, 2006), Mongolia Central Bank (2008)

Determinants 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
Endowments
Macroeconomic competitiveness creates the potential for high productivity, but is not sufficient Productivity ultimately depends on improving the microeconomic capability of the economy and the sophistication of local competition
Macroeconomic Competitiveness
Social Infrastructure and Political Institutions
Basic human capacity
Education Health
Macroeconomic Policies
Fiscal policy
Safety and security
Monetary policy
Political institutions
Economic openness
Rule of law
10
Corruption Perception Index

Ranking (constant sample, 158 countries)
Central Asian Countries

2005 CPI Rank 2006 CPI Rank 2007 CPI Rank
180 160 140 120 100 80 60 40 20 0
ol ia
ta n
rg ia
ija
ta n
na
an
R us si
st a
C hi
Ka za kh s
Ky rg yz st
Az er ba
G eo
on g
jik is
en i
Note: Ranks only available starting in 2005 for all 5 countries Source: Global Corruption Report, 2007
11
Tu
U zb ek
Copyright 2008 , M. Porter
Ta
rk m
is t
an
100
120
140
160
20
40
60
80
Ka za kh st
Rank (157 countries)
Source: Index of Economic Freedom (2008), Heritage Foundation
Openness to Trade
Selected Countries, 2008
12
an Bu lg ar ia Ro m an ia Ar m en ia Uk ra in e M Ky on rg go yz l ia R ep ub Tu lic rk m en is ta Az n er ba i ja n Ta ji k is ta n Th ai la nd In do ne sia Bu rm a Ch in a Sr iL an ka Uz be ki st Ko an re a, So ut Pa h kis ta n Vi et na m Ira n La os Ca m bo di a
Ru ss Ba ia ng la de sh
In di a
Microeconomic Competitiveness
Mongolias Position over Time
Rank 95
96
97
98
2006 2007
99
100
101
Business Comptitiveness Index
Company Operations & Strategy
National Business Environment
Note: Rank versus 111 countries; overall, Mongolia ranks 90th in 2007 PPP adjusted GDP per capita and 99th in Business Competitiveness. Source: Institute for Strategy and Competitiveness, Harvard University (2007), Mongolia GDP from the World Bank
13
Microeconomic Competitiveness: Quality of the Business Environment

Context Contextfor for Firm Firm Strategy Strategy and andRivalry Rivalry
Local rules and incentives that encourage investment and productivity

e.g. salaries, incentives for capital investments, intellectual property protection
Factor Factor (Input) (Input) Conditions Conditions

Demand Demand Conditions Conditions

Vigorous local competition

Openness to foreign and local competition
Access to high quality business inputs

Natural endowments Human resources Capital availability Physical infrastructure Administrative infrastructure (e.g. registration, permitting) Information infrastructure (e.g., transparency) Scientific and technological infrastructure
Related Relatedand and Supporting Supporting Industries Industries

Sophistication of local customers and needs Strict quality, safety, and environmental standards
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
14
Ease of Doing Business

Ranking, 2007 (of 178 countries)
Mongolia, 2007
Favorable Unfavorable
175 150
Mongolias per capita GDP rank: 127 Median Ranking, East Asia and Pacific
125 100 75 50 25 0
Ease of Registering Protecting Enforcing Property Investors Contracts Doing Business Rank
Dealing with Licenses
Starting a Employing Business Workers
Getting Credit
Paying Taxes
Closing a Business
Trading Across Borders
Source: World Bank Report, Doing Business (2008)

15
Factor (Input) Conditions

Mongolias Relative Position 2007
Competitive Disadvantages Relative to GDP per Capita 46 58 64 67 68 72 79 81 88 Port infrastructure quality Ease of access to loans Venture capital availability Overall infrastructure quality Air transport infrastructure quality Quality of management schools Efficiency of legal framework Quality of electricity supply Telephone/fax infrastructure quality Reliability of police services Judicial independence Laws relating to ICT Financial market sophistication 110 110 110 109 107 107 99 97 96 96 96 95 94
Competitive Advantages Relative to GDP per Capita Availability of scientists and engineers Quality of math and science education Railroad infrastructure development Business costs of corruption Cooperation in labor-employer relations Freedom from corruption Local equity market access Quality of scientific research institutions Quality of public schools
University/industry research collaboration 74
Change up/down of more than 5/10 ranks since 2006
16
Context Contextfor for Firm Strategy Firm Strategy and andRivalry Rivalry
Context for Strategy and Rivalry

Mongolia's Relative Position 2007
Competitive Disadvantages Relative to GDP per Capita Property rights Prevalence of trade barriers Decentralization of corporate activity Intellectual property protection Favoritism in decisions of government officials 108 108 107 103 101
Competitive Advantages Relative to GDP per Capita
17
Demand Conditions
Competitive Advantages Relative to GDP per Capita
Competitive Disadvantages Relative to GDP per Capita Stringency of environmental regulations Presence of demanding regulatory standards Government procurement of advanced technology products 111 101 90
18
Related and Supporting Industries

Competitive Disadvantages Relative to GDP per Capita 78 Local supplier quantity Local supplier quality Local availability of process machinery 110 109 100
Competitive Advantages Relative to GDP per Capita Local availability of specialized research and training services
19
Rate of Competitiveness Improvement

Low Income Countries, 2006 - 2007
BCI Value, 2007 High
India
Indonesia Sri Lanka Kenya
Low
Tanzania Vietnam Nigeria Uganda Mali Moldova Georgia Tajikistan Madagascar Zimbabwe Bangladesh Cambodia Kyrgyz Rep. Ethiopia Mozambique Bolivia Cameroon Paraguay Nicaragua Chad Below average Average Dynamism Score, 2006 - 2007
El Salvador Pakistan Mongolia
Gambia Benin
Honduras
Above average
Note, dynamism score uses moving average, using data from 2005 2007. Source: Global Competitiveness Report 2007
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Microeconomic Competitiveness: State of 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
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
Food Food Suppliers Suppliers Restaurants Restaurants Property Property Services Services Maintenance Maintenance Services Services Hotels Hotels
Attractions Attractions and and Activities Activities

e.g., e.g., theme theme parks, parks, casinos, sports casinos, sports
Airlines, Airlines, Cruise Cruise Ships Ships
e.g. e.g. Australian Australian Tourism Tourism Commission, Commission, Great Great Barrier Barrier Reef Reef Authority Authority
Government Government agencies agencies
Educational Educational Institutions Institutions

e.g. e.g. James James Cook Cook University, University, Cairns Cairns College College of of TAFE TAFE
e.g. e.g. Queensland Queensland Tourism Tourism Industry Industry Council Council
Industry Industry Groups Groups
Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden
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The Kenyan Cut Flower Cluster

Trade Performance
Kenyan Cut Flower Exports in thousand US $
$350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 1990 1992 1994 1996 1998 2000 2002 2004 2006 Value Market Share
Kenyan Cut Flower World Export Market Share

5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%
Source: 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.
22
Kenyas Cut Flower Cluster
Sources: Student team research by Kusi Hornberger, Nick Ndiritu, Lalo Ponce-Brito, Melesse Tashu, and Tijan Watt, Microeconomics of Competitiveness Course, 2007
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Process of Cluster Development

The Australian Wine Cluster
1930 First oenology course at Roseworthy Agricultural College 1955 1965 Australian Wine Bureau established 1970 Winemaking school at Charles Sturt University founded 1980 Australian Wine and Brandy Corporation established 1990 1991 to Present New organizations created for education, research, market information, and export promotions Winemakers Federation of Australia established
Australian Wine Research Institute founded
1950s Import of European winery technology
1960s Recruiting of experienced foreign investors, e.g. Wolf Bass
1970s Continued inflow of foreign capital and management
1980s Creation of large number of new wineries
1990s
2005
Surge in exports and international acquisitions
Source: Michael E. Porter and rjan Slvell, The Australian Wine Cluster Supplement, Harvard Business School Case Study, 2002
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National Cluster Export Portfolio

Mongolia, 1997-2006
0.10%
Change In Mongolias Overall World Export Share: 0.00748% Jewelry, Precious Metals and Collectibles (+0.118%, +0.118%) Coal and Briquettes Metal Mining and Manufacturing
Mongolias world export market share, 2006
0.08%
Textiles Leather and Related Products
0.06%
0.04%
Apparel
Transportation and Logistics Hospitality and Tourism
0.02%
Communication Services Agricultural Products Chemical Products
Mongolias Average World Export Share: 0.0158%
0.00% -0.03%
Furniture
-0.02% -0.01%
0.00%
0.01%
0.02%
0.03%
0.04%
0.05%
0.06%
0.07%
0.08%
0.09%
0.10%
Change in Mongolias world export market share, 1997 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. 25 Competitiveness Master - 2008-05-22.ppt
Exports of US$160 Million =

National Cluster Export Portfolio

Mongolia, 1997-2006
0.0040%
Financial Services
0.0035%
Mongolias world export market share, 2006
0.0030%
0.0025%
Business Services
0.0020%
Prefabricated Enclosures and Structures
Oil and Gas
0.0015%
Tobacco
Heavy Machinery Publishing and Printing
0.0010%
Communication Services Automotive
Motor Driven Products Aerospace Vehicles and Defense
0.0005%
0.0000% -0.004%
Footwear Sporting, Recreational and Children's Goods Plastics Analytical Instruments Lighting and Electrical Equipment Entertainment Production Technology Communications Equipment Forest Products Information Technology
-0.003%
-0.002%
-0.001%
0.000%
0.001%
0.002%
0.003%
0.004%
Change in Mongolias world export market share, 1997 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. 26 Competitiveness Master - 2008-05-22.ppt
Exports of US$6.6 Million =

Mongolia Exports by Subcluster

Agriculture, 1997 - 2006
0.030%
Meat and Related Products

0.025%
Overall change in the Agriculture Subcluster World Export Share : -0.005%
Subclusters share of World exports, 2006
0.020%
0.015%
0.010%
Agriculture Subcluster Overall Export Share: +0.008%
Vegetables and Fruits

0.005%
Sugars and Molasses Spirits and Misc. Fermented Beverages Oils and Fats
0.000% -0.008%
Specialty Agricultural Products Feeding Materials

-0.006% -0.004% -0.002% 0.000%
Plants and Flowers

0.002% 0.004% 0.006% 0.008%
Change in Subclusters share of World Exports, 1997 2006

Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. 27 Competitiveness Master - 2008-05-22.ppt
Exports of US$6.5 million =

Creating Competitiveness
Linkages Across Clusters
Fishing & Fishing Products Agricultural Products Distribution Services Jewelry & Precious Metals Entertainment Hospitality & Tourism Textiles Prefabricated Enclosures
Transportation & Logistics
Business Services Financial Services
Lightning & Electrical Analytical Education & Instruments Equipment Power Knowledge Medical Generation Creation Devices Communications Publishing Equipment & Printing Biopharmaceuticals Chemical Products Oil & Gas Plastics Motor Driven Products
Aerospace Vehicles & Information Defense Tech.
Building Fixtures, Equipment & Services
Furniture Construction Materials Heavy Construction Services Forest Products Processed Food
Heavy Machinery
Apparel Leather & Related Products Footwear
Production Technology
Tobacco
Metal Automotive Manufacturing Aerospace Engines Sporting & Recreation Goods

Note: Clusters with overlapping borders or identical shading have at least 20% overlap (by number of industries) in both directions.
28
The Evolution of Regional Economies

San Diego
Hospitality and Tourism
Climate Climate and and Geography Geography
Transportation and Logistics Power Generation Aerospace Vehicles and Defense
Sporting and Leather Goods
U.S. U.S. Military Military
Communications Equipment Information Technology
Analytical Instruments Education and Knowledge Creation
Medical Devices
Bioscience Bioscience Research Research Centers Centers
Biotech / Pharmaceuticals
1910
1930
1950
29
1970
1990
Microeconomic Competitiveness: Company Sophistication
Firm Infrastructure
(e.g. Financing, Planning, Investor Relations)
Support Activities
Human Resource Management

(e.g. Recruiting, Training, Compensation System)
Technology Development
(e.g. Product Design, Testing, Process Design, Material Research, Market Research)
M a r g
Procurement
(e.g. Components, Machinery, Advertising, Services)
Value What buyers are willing to pay
Inbound Logistics
(e.g. Incoming Material Storage, Data Collection, Service, Customer Access)
Operations
(e.g. Assembly, Component Fabrication, Branch Operations)
Outbound Logistics
(e.g. Order Processing, Warehousing, Report Preparation)
Marketing & Sales

(e.g. Sales Force, Promotion, Advertising, Proposal Writing, Web site)
After-Sales Service
(e.g. Installation, Customer Support, Complaint Resolution, Repair)
i n
Primary Activities
Competitiveness requires that local companies upgrade the quality of the value chain
30
Company Sophistication
Relative Position of Mongolian Companies, 2007
Competitive Advantages Relative to GDP per Capita Nature of competitive advantage Production process sophistication Company spending on research and development Extent of staff training 75 80 83 84 Competitive Disadvantages Relative to GDP per Capita Value chain presence Breadth of international markets Reliance on professional management Control of international distribution Extent of marketing Degree of customer orientation Extent of incentive compensation Willingness to delegate authority Extent of regional sales Prevalence of foreign technology licensing 111 108 106 105 101 100 97 96 94 94
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Geographic Influences on Competitiveness

World WorldEconomy Economy
Broad BroadEconomic EconomicAreas Areas
Groups Groupsof ofNeighboring Neighboring Nations Nations
Nation Nation
States, States,Provinces Provinces
Metropolitan MetropolitanAreas Areas
Sub-National Economies
Rural RuralAreas Areas

32
Specialization of Regional Economies

Selected U.S. Geographic Areas
Denver, Denver,CO CO Leather and Leather andSporting SportingGoods Goods Oil and Gas Oil and Gas Aerospace AerospaceVehicles Vehiclesand andDefense Defense Chicago Chicago Communications CommunicationsEquipment Equipment Processed Food Processed Food Heavy HeavyMachinery Machinery Pittsburgh, Pittsburgh,PA PA Construction ConstructionMaterials Materials Metal MetalManufacturing Manufacturing Education Educationand andKnowledge Knowledge Creation Creation
Seattle-BellevueSeattle-BellevueEverett, Everett,WA WA Aerospace AerospaceVehicles Vehicles and Defense and Defense Fishing Fishingand andFishing Fishing Products Products Analytical AnalyticalInstruments Instruments
Wichita, Wichita,KS KS Aerospace AerospaceVehicles Vehiclesand and Defense Defense Heavy HeavyMachinery Machinery Oil Oiland andGas Gas
Boston Boston Analytical AnalyticalInstruments Instruments Education and Education andKnowledge KnowledgeCreation Creation Communications CommunicationsEquipment Equipment
San San FranciscoFranciscoOakland-San Oakland-San Jose Jose Bay Bay Area Area Communications Communications Equipment Equipment Agricultural Agricultural Products Products Information Information Technology Technology
Raleigh-Durham, Raleigh-Durham,NC NC Communications Equipment Communications Equipment Information InformationTechnology Technology Education Educationand and Knowledge KnowledgeCreation Creation Atlanta, Atlanta,GA GA Construction ConstructionMaterials Materials Transportation Transportationand andLogistics Logistics Business Services Business Services
Los Los Angeles Angeles Area Area Apparel Apparel Building Building Fixtures, Fixtures, Equipment Equipment and and Services Services Entertainment Entertainment
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
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.
33
Mongolias Provinces (Aimags)
34
Geographic Influences on Competitiveness

World WorldEconomy Economy
Broad BroadEconomic EconomicAreas Areas
Groups Groupsof ofNeighboring Neighboring Nations Nations
The Neighborhood
Nation Nation
States, States,Provinces Provinces
Metropolitan MetropolitanAreas Areas
Rural RuralAreas Areas

35
The Neighborhood
Northeast Asia
Economic coordination among neighboring countries can significantly enhance competitiveness Integration offers greater opportunities than participation in broader economic forums (e.g., APEC)
36
Regional Economic Strategy

Defining a strategic role for the region in the continent and the world economy Opening internal trade and investment Achieving synergies in enhancing the business environment Facilitating cross-border cluster development Enhancing company capabilities and non-traditional exports
Raising productivity Increasing the attractiveness of the region as a whole for foreign investment Winning greater support from the international community Accelerating economic policy at the national level But
Cross-national collaboration is not a substitute for national microeconomic reforms

East African Business Summit final.ppt
37
Economic Coordination Among Neighbors Capturing Synergies

Improving regional transportation infrastructure Creating an efficient energy network Enhancing regional communications and connectivity Linking financial markets Opening the movement of students for higher education Harmonizing administrative requirements for businesses
Context Contextfor for Strategy Strategy and andRivalry Rivalry

Eliminating trade and investment barriers within the region Simplifying and harmonizing cross-border regulations and paperwork
Coordinating anti-monopoly and fair competition policies

Harmonizing environmental standards Harmonizing product safety standards Establishing reciprocal consumer protection laws Opening government procurement within the region

Facilitating cross-border cluster upgrading, e.g. Tourism Agribusiness Transport & Logistics Business services
Macroeconomic Macroeconomic Competitiveness Competitiveness

Coordinating programs to improve public safety Coordinating macro-economic policies
Regional Regional Strategy Strategy& & Governance Governance

Creating a regional strategy and marketing program Sharing best practices in government operations Creating regional institutions Dispute resolution mechanisms Regional development bank Developing a regional position with international organizations
38
Strategy for Cross-National Regions

Central American Logistical Corridor
Belize Mexico
Guatemala Honduras
El Salvador
Nicaragua
Roads Ports Airports Logistic Corridor Country Boundary

Costa Rica Panama
39
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 a a collaborative collaborative process process involving involving government government at at multiple multiple levels, levels, companies, companies, teaching teaching and and research research institutions, institutions, and and private private sector sector organizations organizations
Competitiveness must become a bottom-up process in which many individuals, companies, and institutions take responsibility Every community and cluster can take steps to enhance competitiveness The private sector must become more engaged in competitiveness to improve rapidly
40
Role of the Private Sector in Economic Development

A companys competitive advantage depends partly on the quality of the business environment A company gains advantages from being part of a cluster Companies have a strong role to play in upgrading their business environment
Take an active role in upgrading the local infrastructure Nurture local suppliers and attract foreign suppliers Work closely with local educational and research institutions, to upgrade their quality and create specialized programs addressing the clusters needs Inform government on regulatory issues and constraints bearing on cluster development Focus corporate philanthropy on enhancing the local business environment
An important role for trade associations

Greater influence if many companies are united Cost sharing between members
41
Defining an Economic Strategy

National NationalValue ValueProposition Proposition
What is the unique competitive position of the nation or region given its location, legacy, and existing and potential strengths?
What roles with neighbors, the region, and the broader world? What unique value as a business location? For what types of activities and clusters?
Developing DevelopingUnique UniqueStrengths Strengths

What elements of macroeconomic competitiveness and the business environment are crucial priorities? What existing and emerging clusters should be developed first?
Achieving Achievingand andMaintaining MaintainingParity Parity with withPeers Peers

What weaknesses must be addressed to achieve parity with peer countries?
Priorities and sequencing are necessity in economic development

42
Toward A Rwandan Economic Strategy

What is Unique about Rwanda?
Low corruption Stable Secure and safe Clean Responsive Integrated economic and social development Unique climate and growing conditions Central location on the African continent Established positions in tea, coffee, tourism Opportunity to lead the region in ICT and services Social innovator in health, education, reconciliation, gender equality, and other areas Disproportionate external interest in the country
Some Implications
Rwanda must maintain stability, safety, orderliness, and lack of corruption at all costs Rwanda must accelerate improvement of skills and business infrastructure, managerial skills, ease of doing business Kigali must become a vibrant capital city Rwanda should seize the opportunity to transform agriculture Rwanda is unlikely to be competitive in exporting bulky goods with low value-toweight Rwanda should develop air freightable goods and services exports to nullify its logistical disadvantages eg, silk, flowers Rwanda in inextricably linked with its neighbors
A new model of African development

43
Rwandas Competitiveness Agenda

Business Business Environment Environment
Land use Physical infrastructure Airport / air service Connectivity Economic zones Energy Renewable Skills development Build towns and increase urbanization outside of Kigali Institutional capacity building Improve government efficiency and cross agency coordination
Cluster Cluster Development Development

Activate a formal cluster development program led by the private sector Established clusters Tea Coffee Tourism Mining Emerging clusters Logistics and transport Construction and real estate ICT services Specialty agriculture (e.g., silk, flowers) Health and other social services Arts and culture (Hillywood)
Private Private Sector Sector

Upgrade private sector capabilities Engage the private sector in economic development Support cooperative private investment funds to jumpstart the private equity market
Neighborhood Neighborhood
Lead economic integration with neighboring countries e.g., Road transportation efficiency Railway development Energy grid
44
Economic Diversification
Upgrade Upgradethe theQuality Qualityand and Efficiency of Existing Export Efficiency of Existing Export Products Productsand andServices Services Upgrade Upgradelocal local industries/clusters industries/clusters
Broaden BroadenExisting ExistingClusters, Clusters, Including Resources Including ResourcesClusters Clusters
Build BuildClusters ClustersAround AroundStrong Strong MNCs MNCs
Develop DevelopRelated RelatedClusters Clusters
Build BuildPositions Positionsin inClusters Clustersthat that are areStrong Strongin inNeighboring Neighboring Regions Regions
Invest Investin inEnabling EnablingConditions Conditions for forAreas Areaswith withSome Somecluster cluster Specific Advantages Specific Advantages
45
Clusters and Economic Policy

Education and Workforce Training Management Training Business Attraction Science and Technology Investments (e.g., centers, university departments, technology transfer) Standard setting and quality initiatives
Clusters
Export Promotion Environmental Stewardship Natural Resource Protection Physical Infrastructure
Market Information and Disclosure
Clusters provide a framework for implementing public policy and organizing public-private collaboration to enhance competitiveness
46
Mongolia is at a critical juncture. Having completed its transition to a market-oriented economy, the challenge now is to attain global competitiveness. This requires a concerted and coordinated effort among all stakeholders, private and public, domestic and foreign. David Dollar, Country Director for Mongolia, World Bank, 29. January 2008
47
Established Mongolian Export Products

Leading Exports by Value, 2006
Industry 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Copper ores and concentrates Gold, non-monetary, excluding ores Wool, other animal hair Zinc ores and concentrates Ores and concentrates of molybdenum, etc. Coal, not agglomerated Quartz, mica, felspar, fluorspar, etc. Sheep, lamb skin leather Crude petroleum oils Womens trousers, breeches and shorts Jerseys, pullovers, cardigans, knitted Copper, copper anodes and alloys T-shirts, other vests, knitted Other meat, meat offal Iron Ore and Concentrates Mens or boys shirts Goat or kid skin leather Womens suits, dresses, skirts, knitted Fruit, nuts excluding oil nuts Other bovine, equine leather Petroleum Oils Hides, skins (excluding furs), raw Other animal materials Mens trousers, breeches and shorts Bovine meat Cluster Metal Mining and Manufacturing Jewelry, Precious Metals and Collectibles Textiles Metal Mining and Manufacturing Metal Mining and Manufacturing Coal and Briquettes Chemical Products Leather and Related Products Oil and Gas Products Apparel Apparel Metal Mining and Manufacturing Apparel Agricultural Products Metal Mining and Manufacturing Apparel Leather and Related Products Apparel Agricultural Products Leather and Related Products Oil and Gas Products Agricultural Products Agricultural Products Apparel Agricultural Products Change in World Export Value (in Export Share (1997$thousands) 2006) Share 2.16% -1.62% $ 635,426 0.53% 0.53% $ 270,105 3.11% 2.15% $ 157,305 1.08% 1.08% $ 91,140 0.51% -0.48% $ 47,793 0.09% 0.09% $ 45,076 3.85% -0.09% $ 35,067 2.26% 2.26% $ 24,578 0.00% 0.00% $ 19,841 0.09% 0.07% $ 18,183 0.06% 0.02% $ 17,617 0.03% -0.01% $ 16,202 0.05% 0.05% $ 13,241 0.03% 0.03% $ 11,488 0.04% 0.04% $ 11,478 0.11% 0.05% $ 10,390 1.34% 1.34% $ 7,985 0.06% 0.06% $ 6,908 0.01% 0.01% $ 6,428 0.04% 0.04% $ 6,285 0.00% 0.00% $ 5,317 0.09% -0.33% $ 5,219 0.10% -0.02% $ 4,830 0.02% 0.02% $ 4,748 0.02% -0.05% $ 4,734
Top 25 Industries (by value) as % of Mongolias total goods exports: 95.79%

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. 48 Competitiveness Master - 2008-05-22.ppt
Processed Semi-Processed Unprocessed

Established Mongolian Export Products

Leading Exports by Share, 2006
Industry 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Quartz, mica, felspar, fluorspar, etc. Wool, other animal hair Sheep, lamb skin leather Copper ores and concentrates Goat or kid skin leather Zinc ores and concentrates Gold, non-monetary, excluding ores Ores of molybdenum, titanium, zirconium Balloons, and other non-powered aircraft Bones, horns, ivory, coral and like products Mens or boys shirts Other animal materials Other non-ferrous ores and concentrates Carpets and other floor coverings, knotted Coal, not agglomerated Hides, skins (excluding furs), raw Womens trousers, breeches and shorts Lignite Womens blouses, and shirts, knitted Other plastic waste and scrap Mens or boys shirts, knitted Womens suits, dresses, skirts, knitted Jerseys, pullovers, cardigans, knitted Mens or boys jackets and blazers Womens or girls suits and ensembles Cluster Chemical Products Textiles Leather and Related Products Metal Mining and Manufacturing Leather and Related Products Metal Mining and Manufacturing Jewelry, Precious Metals and Collectibles Metal Mining and Manufacturing Aerospace Vehicles and Defense Agricultural Products Apparel Agricultural Products Metal Mining and Manufacturing Textiles Coal and Briquettes Agricultural Products Apparel Coal and Briquettes Apparel Plastics Apparel Apparel Apparel Apparel Apparel Change in World Export Value (in Export Share (1997$thousands) 2006) Share 3.85% -0.09% $ 35,067 3.11% 2.15% $ 157,305 2.26% 2.26% $ 24,578 2.16% -1.62% $ 635,426 1.34% 1.34% $ 7,985 1.08% 1.08% $ 91,140 0.53% 0.53% $ 270,105 0.51% -0.48% $ 47,793 0.24% 0.24% $ 63 0.12% -0.65% $ 379 0.11% 0.05% $ 10,390 0.10% -0.02% $ 4,830 0.10% 0.03% $ 1,249 0.10% 0.10% $ 1,467 0.09% 0.09% $ 45,076 0.09% -0.33% $ 5,219 0.09% 0.07% $ 18,183 0.08% 0.08% $ 124 0.08% 0.08% $ 4,548 0.07% 0.07% $ 1,448 0.06% 0.05% $ 3,109 0.06% 0.06% $ 6,908 0.06% 0.02% $ 17,617 0.06% 0.05% $ 2,309 0.05% 0.05% $ 1,557
Top 25 Industries (by share) as % of Mongolias total goods exports: 90.38%


Upgrading Mongolian Export Portfolio

Niche Positions Outside of Leading Clusters
Cluster Cluster World Export Share Subcluster Industry Industry Change in Share of Export Value (in Share (1997World $thousands) 2006) Exports 0.12% -0.65% $ 379 0.10% -0.02% $ 4,830 0.09% -0.33% $ 5,219 0.03% 0.03% $ 11,488 0.02% -0.05% $ 4,734 3.85% 0.03% 0.02% 0.02% 0.02% 0.05% 0.24% 0.03% 0.03% 0.07% -0.09% 0.03% 0.02% 0.01% 0.02% 0.05% 0.24% 0.03% 0.03% 0.07% $ $ $ $ $ $ $ $ $ $ 35,067 641 404 1,101 85 1,483 63 1,230 1,195 1,448
Agricultural Products
0.008%
Meat and Related Products Meat and Related Products Meat and Related Products Meat and Related Products Meat and Related Products Misc. Crude Materials Oil and Gas Machinery Oil and Gas Machinery Prefabricated Buildings Mining Machinery Wood Furnishings Aircraft Appliances Motor Vehicles Assembly Plastic Waste
Bones, horns, ivory, coral, etc. Other animal materials Hides, skins (excluding furs), raw Other meat, meat offal Bovine meat Quartz, mica, felspar, fluorspar, etc. Other boring machinery, not self-propelled Rock drills, earth borers Prefabricated buildings Rock/tunneling machinery, not self-propelled Wood for domestic use, not furniture Balloons, and other non-powered aircraft Sewing machines and parts Other special purpose vehicles Other plastic waste and scrap
Chemical Products Oil and Gas Products Prefabricated Enclosures and Structures Heavy Machinery Furniture Aerospace Vehicles and Defense Motor Driven Automotive Plastics
0.008% 0.002%
0.002% 0.002% 0.001% 0.001% 0.001% 0.001% 0.000%

Foreign Direct Investment

By Source Country, 2006
Source: Annual Report, 2006), Mongolia Central Bank (2008)

51
10
20
30
40
50
60
70
% of GDP in the Informal Economy, 2003
Source: World Bank Doing Business and Friedrich Schneider
Size of the Informal Economy
Selected Countries
52
G e A z or er gia ba U ijan kr a Th ine C aila am n bo d d R ia Sr uss ia i P h Lan ili ka K a ppi za nes kh st an Ky Bra rg zi yz l Pa sta Ba kis n ng ta n U l ad zb es ek h is ta n La M o al s ay s Ko ia re Ta a iw an In Ind do i a n M esi on a go lia Vi Ir an et na m Si Ch ng i na ap Au ore N ew str a Ze lia al an Ja d pa n
Gini Index
Note: Most recent Gini index data available for each country (1999 2003). Source: World Bank, World Development Indicators, 2007.
Pa
So pu a ut h
10
20
30
40
50
60
Income Inequality
Selected Countries
53
Af r ic Ne B a w raz G il u M i ne al a ay sia H C on Ph h g ilip ina Ko p ng ine s , Si Ch ng i n ap a Th ore C aila am n bo d Tu Ge dia rk or m gi R en a us si Sr ista an i L n F e an d ka Ira I era n, nd tio I s on n la es m ic ia Vi Rep et . na m U In zb d e ia A z ki s er tan ba Au ija st n La ral Ka o P ia za DR kh T a st a Ba jiki n ng sta la n M des K o on h re gol a, i a Ky P Re rg ak p. yz is R tan ep ub Ja l i c pa n
Tests of a National Economic Strategy

Has the country articulated a distinctive position?
That will create a positive identity for the country? That will inspire citizens?
Does the strategy build on strengths?

Are the strengths realistic versus neighbors and other peer countries?
Does the strategy fit with trends in the region and the world economy? Is the strategy realistic given the countrys weaknesses. Can those weaknesses inconsistent with the strategy be neutralized? Are social and political reforms integrated with economic reforms pursued simultaneously? Is there the political will and the political consensus to implement the strategy?
54
Tests of a National Economic Strategy contd

Do the policy priorities fit the strategy?
The choice of policies to address The sequence in which policies are implemented?
Has the strategy been communicated clearly to the stakeholders? Is the private sector engaged? Is government organized around the strategy? Is there an overall coordinating structure for economic development? Is the quality of governmental agencies and other institutions sufficient for effective implementation? Are there mechanisms to measure progress and review / modify the strategy as prosperity improves or conditions change?
55

Competitiveness Creating A Mongolian Economic Strategy

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Competitiveness Creating A Mongolian Economic Strategy

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Competitiveness: Creating a Mongolian Economic Strategy

Copyright 2007 Professor Michael E. Porter

Selected Middle- and Lower-Income Countries

Growth of Real GDP per Capita (PPP-adjusted), CAGR, 1998-2007

Copyright 2008 Professor Michael E. Porter

Mongolias Competitive Position in 2008

Mongolia needs a new focus on upgrading competitiveness

Copyright 2008 Professor Michael E. Porter

Copyright 2008 Professor Michael E. Porter

Created Created Prosperity Prosperity

Competitiveness Master - 2008-05-22.ppt

Copyright 2008 Professor Michael E. Porter

Mongolias Export Share Trends

Processed Goods Semi-processed Goods Unprocessed Goods Services TOTAL

Copyright 2008 Professor Michael E. Porter

Inward Foreign Investment Flows

Foreign Direct Investment

Source: Annual Report, 2006), Mongolia Central Bank (2008)

Copyright 2008 Professor Michael E. Porter

Copyright 2008 Professor Michael E. Porter

Safety and security

Competitiveness Master - 2008-05-22.ppt

Copyright 2008 Professor Michael E. Porter

Corruption Perception Index

Central Asian Countries

180 160 140 120 100 80 60 40 20 0

Rank (157 countries)

Source: Index of Economic Freedom (2008), Heritage Foundation

Selected Countries, 2008

an Bu lg ar ia Ro m an ia Ar m en ia Uk ra in e M Ky on rg go yz l ia R ep ub Tu lic rk m en is ta Az n er ba i ja n Ta ji k is ta n Th ai la nd In do ne sia Bu rm a Ch in a Sr iL an ka Uz be ki st Ko an re a, So ut Pa h kis ta n Vi et na m Ira n La os Ca m bo di a

Copyright 2008 , M. Porter

Business Comptitiveness Index

Company Operations & Strategy

National Business Environment

Copyright 2008 Professor Michael E. Porter

Microeconomic Competitiveness: Quality of the Business Environment

Local rules and incentives that encourage investment and productivity

Factor Factor (Input) (Input) Conditions Conditions

Demand Demand Conditions Conditions

Vigorous local competition

Access to high quality business inputs

Related Relatedand and Supporting Supporting Industries Industries

Availability of suppliers and supporting industries

Copyright 2008 Professor Michael E. Porter

Ease of Doing Business

Dealing with Licenses

Starting a Employing Business Workers

Trading Across Borders

Source: World Bank Report, Doing Business (2008)

Copyright 2008 Professor Michael E. Porter

Factor Factor (Input) (Input) Conditions Conditions

Factor (Input) Conditions

University/industry research collaboration 74

Change up/down of more than 5/10 ranks since 2006

Copyright 2008 Professor Michael E. Porter

Context for Strategy and Rivalry

Competitive Advantages Relative to GDP per Capita

Change up/down of more than 5/10 ranks since 2006

Copyright 2008 Professor Michael E. Porter

Demand Demand Conditions Conditions

Competitive Advantages Relative to GDP per Capita

Change up/down of more than 5/10 ranks since 2006

Copyright 2008 Professor Michael E. Porter