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Microeconomics of Competitiveness

Session 3:
Introduction to the Diamond Model

Microeconomics of Competitiveness
February 8, 2011

Professor Hirotaka Takeuchi

This presentation draws on ideas from Professor Porter’s articles and books, including, The Competitive Advantage of Nations (The Free Press,
1990), “The Microeconomic Foundations of Economic Development,” in The Global Competitiveness Report, (World Economic Forum), “Clusters
and the New Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 1998) and ongoing
research at the Institute for Strategy and Competitiveness. Additional information may be found at the website of the Institute for Strategy and
Competitiveness, www.isc.hbs.edu 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.
What is Competitiveness?
• Competitiveness depends on the productivity with which a nation uses
its human, capital, and physical resources.
– Productivity sets the sustainable standard of living (wages, returns on
capital, returns on natural resources)
– It is not what industries a nation competes in that matters for prosperity, but
how productively it competes in those industries
– Productivity in a national economy arises from a combination of domestic
and foreign firms
– The productivity of “local” or domestic industries is fundamental to
competitiveness, not just that of export industries

• Only competitive businesses can create jobs, rising income, and wealth
• 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
20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 2 Copyright © 2011 Professor Michael E. Porter
Decomposing Prosperity

• Standard of living
Prosperity

Domestic • Income level


Purchasing Per Capita Income • Inequality
Power
• Local prices
– Efficiency of local
industries
– Level of local market
competition
• Consumption taxes

Labor Labor
Productivity Utilization

• Skills • Workforce participation rate


• Capital stock – Population age profile
• Total factor productivity • Unemployment rate
• Working hours
20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 3 Copyright © 2011 Professor Michael E. Porter
The Role of Innovation in Competitiveness

Productivity

Inbound Outbound
Domestic Domestic
Exports Imports foreign direct foreign direct
investment innovation
investment investment

Country Competitive Environment

20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 4 Copyright © 2011 Professor Michael E. Porter
Domestic Investment Performance
Gross Fixed Investment
OECD Countries
as % of GDP, 2009

30%
South Korea Canada
Australia

Spain
25%
Czech
Slovenia
Republic France Belgium
Slovakia
Hungary Mexico Switzerland Poland
OECD average: 20.22% Japan Finland Norway
Austria
20% New Zealand Chile
Estonia Portugal
Iceland Denmark
Italy
Ireland Netherlands Germany
Turkey Sweden
Israel
15% Greece
United Kingdom

United States

10%

5%

OECD average:-1.99%
0%
‐12% ‐10% ‐8% ‐6% ‐4% ‐2% 0% 2% 4%

Change in Gross Fixed Investment (as % of GDP), 2005 to 2009


Note: Includes inbound FDI; excludes Luxembourg.
Source: EIU (2010)
20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 5 Copyright © 2011 Professor Michael E. Porter
Export Performance
OECD Countries
Exports of Goods and
Services (% of GDP), 2009
100%
OECD Average: -1.12%

90%
Ireland

80%
Hungary
Czech Republic
Belgium
70%
Estonia
Netherlands
Slovakia
60%
Slovenia
Austria
50% Switzerland
Denmark Sweden South Korea
OECD Average: 41.87% Norway Chile Iceland
40% Germany
Poland
Israel
Finland
Portugal
30% Canada Mexico New Zealand
France Spain United Kingdom
Italy Turkey
20% Greece
Australia

10% Japan United States

0%
-15% -10% -5% 0% 5% 10% 15%
Note: Luxembourg omitted Change in Exports of Goods and Services (% of GDP), 2005 to 2009
Source: EIU (2010), authors calculations
20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 6 Copyright © 2011 Professor Michael E. Porter
Import Shares
Imports as %
OECD Countries
GDP 2009
100%
OECD Average: -2.38%

90%

80%
Belgium
Hungary
Ireland
70%
Estonia (21.92%) Czech Republic
60% Slovakia (22.89%) Netherlands
Slovenia
50%
Austria
South Korea
Switzerland Denmark
OECD Average: 39.43% Iceland
40% Sweden
Portugal Poland Germany
Finland Chile
Israel Canada United Kingdom
30% Mexico
New Zealand
Spain France Norway
Greece Turkey
20% Italy Australia

United States
10%
Japan

0%
-15% -10% -5% 0% 5% 10% 15%
Change of Imports as Share of GDP, 2005 to 2009
Note: Luxembourg omitted.
Source: EIU, 2010
20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 7 Copyright © 2011 Professor Michael E. Porter
Inbound Foreign Investment Performance
Stocks and Flows, OECD Countries
Inward FDI Stocks as % of
GDP, Average 2005 - 2008
100%
OECD average:18.72%% Belgium (69.74%, 113.38% )

90%

80% Netherlands Estonia

70%
Switzerland
Hungary
60% Chile
Slovakia Czech Republic Sweden
50% New Zealand

Portugal United Kingdom OECD average: 40.92%


40% Spain Austria
Denmark Poland Iceland
Australia Finland France
30% Canada
Israel
Norway
Mexico
Slovenia
20% Germany
Italy Turkey
Greece

10% South Korea United States


Japan
0%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
FDI Inflows as % of Gross Fixed Capital Formation, Average 2005 - 2008
Note: Luxembourg omitted
Source: UNCTAD, World Investment Report (2011)
20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 8 Copyright © 2011 Professor Michael E. Porter
Outbound Foreign Investment Performance
Outward FDI Stocks as Stocks and Flows, OECD Countries
% of GDP, Average 2005
- 2008
100%
OECD average: 25.42%% Netherlands (104.55%)
Switzerland (64.00%, Belgium (80.87%, 140.53%)
90% 140.50% ) Iceland (77.51%)

80%

70%
Sweden

60% United Kingdom


Ireland
50%
Denmark
France
Finland
40% Germany OECD average: 37.60%

Spain Norway
Canada
30% Austria
Australia Portugal
Israel
Estonia
20% United States Italy
Chile
New Zealand Japan Slovenia
10% Greece
Mexico Czech Republic Hungary (126.48%)
Turkey Poland
0%
Slovakia
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
FDI Outflows as % of Gross Fixed Capital Formation, Average 2005 - 2008
Note: Luxembourg omitted; data for South Korea not available. Belgium and Switzerland both off far right corner of chart.
Source: UNCTAD, World Investment Report (2011)
20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 9 Copyright © 2011 Professor Michael E. Porter
Innovative Output
Selected OECD Countries, 1999 to 2009
Average U.S. utility patents per
1 million population, 2007-2009
350

300

Japan Taiwan
United States
250

200

Israel
Finland
Switzerland
150
South Korea
Germany
Sweden
100 Canada

Netherlands
Denmark
Belgium Australia
Austria Norway
50 France
United Kingdom Ireland
Italy New Zealand

Mexico Hungary Spain


0
-5% -3% -1% 1% 3% 5% 7% 9%
CAGR of US-registered patents, 1999 to 2009 10,000 patents (avg. 1999 – 2009) =
Source: USPTO (2010), Groningen Growth and Development Centre, Total Economy Database (2010)
20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 10 Copyright © 2011 Professor Michael E. Porter
Enablers / Indicators of Competitiveness
Comparative Innovation Quality
Average citations
per patent, 2002 -
2004
3

2.5

1.5

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Source: NBER Patent Data Project. Includes all citations from 1976 – 2006. Author’s analysis.
20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 11 Copyright © 2011 Professor Michael E. Porter
Top Japanese Originators of U.S. Patents, 2005-2009

First-Named Assignee 2005 2006 2007 2008 2009 Total


Canon Kabushiki Kaisha 1,721 2,235 1,881 2,012 2,112 9,961
Toshiba Corporation 1,244 1,634 1,485 1,516 1,600 7,479
Matsushita Electric Industrial
1,616 2,068 1,816 1,405 42 6,947
Co., Ltd.
Sony Corporation 986 1,606 1,321 1,341 1,507 6,761
Hitachi, Ltd 1,255 1,670 1,306 1,255 1,004 6,490
Fujitsu Limited 1,091 1,404 1,201 1,395 1,105 6,196
Seiko Epson Corporation 843 1,143 1,145 1,138 1,238 5,507
Denso Corporation 601 713 746 653 705 3,418
Ricoh Company, Ltd. 438 635 651 778 873 3,375
Honda Motor Co., Ltd. 654 705 598 597 617 3,171
Sharp Corporation 464 655 634 577 618 2,948
NEC Corporation 636 712 584 514 497 2,943
Mitsubishi Denki Kabushiki
590 578 448 447 484 2,547
Kaisha
Renesas Technology
600 575 497 497 368 2,537
Corporation
Fujifilm Corporation - 3 657 861 869 2,390
Sanyo Electric Co., Ltd. 352 513 452 443 427 2,187
Semiconductor Energy
292 405 413 468 545 2,123
Laboratory Co., Ltd.
Fuji Photo Film Co., Ltd 749 904 294 13 14 1,974
Panasonic Corporation - - - 241 1,688 1,929
Toyota Jidosha K.K. 269 376 348 382 448 1,823
Brother Kogyo Kabushiki Kaisha 151 238 323 459 527 1,698
All Other Japanese Assignees 15,787 20,099 17,877 18,102 18,466 90,331
Total Japanese Utility Patents 30,341 36,807 33,354 33,682 35,501 169,685

Source: Patenting By Geographic Region (State and Country), Breakout By Organization, USPTO (2010)
20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 12 Copyright © 2011 Professor Michael E. Porter
Determinants of Competitiveness
Microeconomic Competitiveness

Quality of the Sophistication


National State of Cluster of Company
Business Development Operations and
Environment Strategy

Macroeconomic Competitiveness

Social
Infrastructure Macroeconomic
and Political Policies
Institutions

Endowments

• Endowments create a foundation for prosperity, but true prosperity is created by productivity in the use
of endowments
• Macroeconomic competitiveness sets 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
20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 13 Copyright © 2011 Professor Michael E. Porter
Location and Company Competitive Advantage

Internal External

• Competitive advantage • Competitive advantage resides


resides inside the company in the locations in which the
company is based
• Competitive success • Cluster participation is an
depends on company important contributor to
choices competitiveness
• Company strategy choices and
success in implementation are
significantly influenced by
location
20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 14 Copyright © 2011 Professor Michael E. Porter
Quality of the National Business Environment
The Diamond
Context for
Firm
Strategy
and Rivalry

• Local rules and incentives that


encourage investment and productivity
– e.g. salaries, incentives for capital
Factor investments, intellectual property
Demand
(Input) protection, corporate governance
standards Conditions
Conditions
• Open and vigorous local competition
– Openness to foreign competition
– Competition laws
• Access to high quality business • Sophisticated and demanding local
inputs customers and needs
– Human resources – e.g., Strict quality, safety, and
– Capital availability environmental standards
Related and – Consumer protection laws
– Physical infrastructure
– Administrative and information
Supporting
infrastructure (e.g. registration, Industries
permitting, transparency)
– Scientific and technological • Availability of suppliers and supporting
infrastructure
industries
– Efficient access to natural endowments

• 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
20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 15 Copyright © 2011 Professor Michael E. Porter
Common Issues in Diamond Analysis

• Categorizing influences in the diamond

20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 16 Copyright © 2011 Professor Michael E. Porter
Quality of the National Business Environment
The Diamond
Context for
Firm
Strategy
and Rivalry

• Local rules and incentives that


encourage investment and productivity
– e.g. salaries, incentives for capital
Factor investments, intellectual property
Demand
(Input) protection, corporate governance
standards Conditions
Conditions
• Open and vigorous local competition
– Openness to foreign competition
– Competition laws
• Access to high quality business • Sophisticated and demanding local
inputs customers and needs
– Human resources – e.g., Strict quality, safety, and
– Capital availability environmental standards
Related and – Consumer protection laws
– Physical infrastructure
– Administrative and information
Supporting
infrastructure (e.g. registration, Industries
permitting, transparency)
– Scientific and technological • Availability of suppliers and supporting
infrastructure
industries
– Efficient access to natural endowments

• 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
20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 17 Copyright © 2011 Professor Michael E. Porter
Common Issues in Diamond Analysis

• Categorizing influences in the diamond

• Levels of influence
– General vs. cluster specific
– National / state / metropolitan area / inner city

20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 18 Copyright © 2011 Professor Michael E. Porter
Levels of Influence on the Diamond
Selected Examples

Context for
Firm Strategy
and Rivalry

National
 e.g., intellectual property legislation;
Factor antitrust policy
Regional Demand
(Input)
 e.g., state tax policy Conditions
Conditions
Cluster
 e.g., number of local competitors

National Cross-National
 e.g., capital market conditions  e.g., Nordic Mobile Telephone network;
Regional character-based Asian languages
 e.g., local public education system; National
regional universities Related and  e.g., environmental regulation;
Cluster Supporting
consumer rights legislation
 e.g., cluster-specific Regional
research institutions and educational Industries  e.g., state and local procurement rules
programs Cluster
Regional  e.g., sophistication of local customers
 e.g., breadth of clusters, density of IFCs
Related Clusters
 e.g., existence of common suppliers and technology
assets
Cluster
 e.g., depth of supplier industries
20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 19 Copyright © 2011 Professor Michael E. Porter
Common Issues in Diamond Analysis

• Categorizing influences in the diamond

• Levels of influence
– General vs. cluster specific
– National / state / metropolitan area / inner city

• Arrows in the diamond

20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 20 Copyright © 2011 Professor Michael E. Porter
Quality of the National Business Environment
The Diamond
Context for
Firm
Strategy
and Rivalry

• Local rules and incentives that


encourage investment and productivity
– e.g. salaries, incentives for capital
Factor investments, intellectual property
Demand
(Input) protection, corporate governance
standards Conditions
Conditions
• Open and vigorous local competition
– Openness to foreign competition
– Competition laws
• Access to high quality business • Sophisticated and demanding local
inputs customers and needs
– Human resources – e.g., Strict quality, safety, and
– Capital availability environmental standards
Related and – Consumer protection laws
– Physical infrastructure
– Administrative and information
Supporting
infrastructure (e.g. registration, Industries
permitting, transparency)
– Scientific and technological • Availability of suppliers and supporting
infrastructure
industries
– Efficient access to natural endowments

• 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
20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 21 Copyright © 2011 Professor Michael E. Porter
Common Issues in Diamond Analysis

• Categorizing influences in the diamond

• Levels of influence
– General vs. cluster specific
– National / state / metropolitan area / inner city

• Arrows in the diamond

• Separating cause and effect

20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 22 Copyright © 2011 Professor Michael E. Porter
Quality of the National Business Environment
The Diamond
Context for
Firm
Strategy
and Rivalry

• Local rules and incentives that


encourage investment and productivity
– e.g. salaries, incentives for capital
Factor investments, intellectual property
Demand
(Input) protection, corporate governance
standards Conditions
Conditions
• Open and vigorous local competition
– Openness to foreign competition
– Competition laws
• Access to high quality business • Sophisticated and demanding local
inputs customers and needs
– Human resources – e.g., Strict quality, safety, and
– Capital availability environmental standards
Related and – Consumer protection laws
– Physical infrastructure
– Administrative and information
Supporting
infrastructure (e.g. registration, Industries
permitting, transparency)
– Scientific and technological • Availability of suppliers and supporting
infrastructure
industries
– Efficient access to natural endowments

• 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
20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 23 Copyright © 2011 Professor Michael E. Porter
Common Issues in Diamond Analysis

• Categorizing influences in the diamond

• Levels of influence
– General vs. cluster specific
– National / state / metropolitan area / inner city

• Arrows in the diamond

• Separating cause and effect

• Identifying the constraints in a country or a cluster


– Short-term
– Longer-term
20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 24 Copyright © 2011 Professor Michael E. Porter
Quality of the National Business Environment
The Diamond
Context for
Firm
Strategy
and Rivalry

• Local rules and incentives that


encourage investment and productivity
– e.g. salaries, incentives for capital
Factor investments, intellectual property
Demand
(Input) protection, corporate governance
standards Conditions
Conditions
• Open and vigorous local competition
– Openness to foreign competition
– Competition laws
• Access to high quality business • Sophisticated and demanding local
inputs customers and needs
– Human resources – e.g., Strict quality, safety, and
– Capital availability environmental standards
Related and – Consumer protection laws
– Physical infrastructure
– Administrative and information
Supporting
infrastructure (e.g. registration, Industries
permitting, transparency)
– Scientific and technological • Availability of suppliers and supporting
infrastructure
industries
– Efficient access to natural endowments

• 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
20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 25 Copyright © 2011 Professor Michael E. Porter
Government and the Diamond
Selected Influences
Context for
Firm
Strategy
and Rivalry

+ Reduce tariffs
Factor + Technological neutrality
- Limit FDI, imports Demand
(Input)
Conditions
Conditions - Targeting that limits
competition

+ Enhance university + Encourage early demand


programs in key disciplines + Embrace international
- Government-led research standards
and development programs Related and - Require unusual local
Supporting standards
Industries

• Government policy can reinforce or impede the process of upgrading

20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 26 Copyright © 2011 Professor Michael E. Porter
Measuring Competitiveness
Country Competitiveness Index

• Measures a country’s current competitiveness, controlling for


endowments

• Explains the sustainable level of prosperity

• Highlights strengths and weaknesses of a country’s business


environment relative to its overall level of current prosperity

• Reveals patterns of competitive evolution of individual countries

• Country-level GCI data will be distributed to project teams once


countries are selected.

20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 27 Copyright © 2011 Professor Michael E. Porter
New Global Competitiveness Index
Overview of Indicators
Level 2 Level 3 Level 4 Level 5 Level 6
Main Areas Broad Categories Subcategories Narrow Indicators
Subcategories
• Factor Conditions → • Logistical → • Quality of roads
Quality of the • Context for Strategy infrastructure • Quality of
National and Rivalry • Communication railroad
Business • Demand Conditions infrastructure • Quality of ports
Environment
• Supporting and • Administrative • Quality of
Microeconomic Related Industries infrastructure airports
Competitiveness • Capital market • Quality of
• Strategy and operational infrastructure electricity supply
Sophistication effectiveness
of Company • Innovation • Quality of
• Internationalization of infrastructure
Operations and domestic
firms
Strategy business
• Organizational practices transport network

Social • Basic Human


Infrastructure Capacity
and Political • Political institutions
Institutions • Rule of law, safety
Macroeconomic
Competitiveness

Macroeconomic • Fiscal policy


Policy • Monetary policy

20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 28 Copyright © 2011 Professor Michael E. Porter
Ranking Economic Competitiveness
GDP per Capita, log scale
ISC Country Competitiveness Index, 2009
(Purchasing Power Adjusted)
5.0
$100,000
Qatar Luxembourg

Brunei USA Norway Singapore


UAE Switzerland
Kuwait Sweden
Bahrain Ireland UK
4.5 Greece Italy Spain Finland Denmark
New Zealand
Hungary Japan
Estonia
Croatia
Poland
Russia Mexico
Argentina Chile
Venezuela Turkey Malaysia
Brazil Costa Rica
4.0
$10,000 Dominican Republic Peru Saudi Arabia
Jamaica Thailand Tunisia

Egypt Algeria China


Jordan
Paraguay
Morocco
Indonesia
Guyana Philippines
3.5 Vietnam India
Nicaragua Indonesia
Colombia Nigeria
Senegal
Bangladesh Benin
Cote d’ivoire Ghana Gambia
Uganda Tanzania
3.0
$1,000 Madagascar
Ethiopia Malawi

Burundi
2.5

Low High
New Global Competitiveness Index 2009
20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 29 Copyright © 2011 Professor Michael E. Porter
Factor
(Input)
Factor (Input) Conditions
Conditions Japan’s Relative Position 2010
Competitive Advantages Competitive Disadvantages
Relative to GDP per Capita Relative to GDP per Capita

Utility patents per million population 2 Time required to start a business 77


Quality of railroad infrastructure 3 Burden of government regulation 75
Quality of electricity supply 3 Soundness of banks 75
Mobile telephone subscribers per 100 population 74
Availability of scientists and engineers 4
Number of procedures required to start a business 73
Quality of business transport network 6
Quality of management schools 65
Quality of telephone infrastructure 7
Quality of air transport infrastructure 56
Domestic credit to private sector 11 Ease of access to loans 50
Quality of scientific research institutions 13 Venture capital availability 47
Financing through local equity market 17 Internet access in schools 39
Internet users per 100 population 18 Regulation of securities exchanges 39
University-industry research collaboration 19 Getting Credit Legal rights index (WB) 39
Quality of roads 20 Quality of port infrastructure 38
Paying Taxes: Payments number (WB) 38
Quality of the educational system 38
Financial market sophistication 36
Telephone lines per 100 population 34
Burden of customs procedures 34
Ease of starting a new business 33
Quality of math and science education 32
Tertiary enrollment 32
Personal computers per 100 population 27
Protection of minority shareholders’ interests 24
Brain drain 24

Note: Rank versus 133 countries; overall, Japan ranks 23rd in 2009 PPP adjusted GDP per capita and 21st in Global Competitiveness
Source: Institute for Strategy and Competitiveness, Harvard University (2010), based in part on survey data from the World Economic Forum.
20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 30 Copyright © 2011 Professor Michael E. Porter
Microeconomic Competitiveness Indicators
Ranking, 2010 (vs.
Ease of Doing Business Rankings: Japan, 2010
183 countries)
Favorable Unfavorable
180

160

140

120

100

80

60

40
Japan’s GDP per
capita rank: 23 20

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Source: World Bank Report, Doing Business (2010).


20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 31 Copyright © 2011 Professor Michael E. Porter
Demand Demand Conditions
Conditions
Japan’s Relative Position 2010

Competitive Advantages Competitive Disadvantages


Relative to GDP per Capita Relative to GDP per Capita

Buyer sophistication 2 Government success in ICT promotion 41


Demanding regulatory standards 3 Gov’t procurement of advanced tech. 36
Stringency of environmental regulations 7 Laws relating to ICT 35

Note: Rank versus 133 countries; overall, Japan ranks 23rd in 2009 PPP adjusted GDP per capita and 21st in Global Competitiveness
Source: Institute for Strategy and Competitiveness, Harvard University (2010), based in part on survey data from the World Economic Forum.
20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 32 Copyright © 2011 Professor Michael E. Porter
Context for Firm
Strategy Context for Strategy and Rivalry
and Rivalry Japan’s Relative Position 2010
Competitive Advantages Competitive Disadvantages
Relative to GDP per Capita Relative to GDP per Capita

Market dominance by business groups 1 Tax impact on incentives to work & invest 99
Cooperation in labor-employer relations 5 Prevalence of foreign ownership 95
Effectiveness of antitrust policy 5 Prevalence of trade barriers 81
Intensity of local competition 7 Disruption from state-owned enterprises 81
Pay and productivity 11 Business impact of rules on FDI 80
Strength of investor protection 16 FDI and technology transfer 71
Intellectual property protection 21 Effect of taxes/subsidies on competition 69
Restrictions on capital flows 49
Tariff rate 41
Rigidity of employment 36
Auditing and reporting standards 35
Regulatory quality 31
Efficacy of corporate boards 27

Note: Rank versus 133 countries; overall, Japan ranks 23rd in 2009 PPP adjusted GDP per capita and 21st in Global Competitiveness
Source: Institute for Strategy and Competitiveness, Harvard University (2010), based in part on survey data from the World Economic Forum.
20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 33 Copyright © 2011 Professor Michael E. Porter
Related and
Supporting Related and Supporting Industries
Industries
Japan’s Relative Position 2010

Competitive Advantages Competitive Disadvantages


Relative to GDP per Capita Relative to GDP per Capita

Local supplier quantity 1 None


Local supplier quality 2
Local availability of process machinery 2
Extent of collaboration in clusters 2
State of cluster development 4
Availability of research/training services 13
Availability of latest technologies 20
Extent of cluster policy 20

Note: Rank versus 133 countries; overall, Japan ranks 23rd in 2009 PPP adjusted GDP per capita and 21st in Global Competitiveness
Source: Institute for Strategy and Competitiveness, Harvard University (2010), based in part on survey data from the World Economic Forum.
20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 34 Copyright © 2011 Professor Michael E. Porter
Improving Company Sophistication
Relative Position of Japanese Companies, 2010

Competitive Advantages Competitive Disadvantages


Relative to GDP per Capita Relative to GDP per Capita
Nature of competitive advantage 1 Extent of incentive compensation 32
Production process sophistication 1
Degree of customer orientation 1
Control of international distribution 1
Value chain breadth 2
Capacity for innovation 2
Company spending on R&D 3
Breadth of international markets 3
Extent of staff training 4
Firm-level technology absorption 5
Extent of regional sales 5
Extent of marketing 10
Foreign technology licensing 13
Willingness to delegate authority 16
Reliance on professional management 16

Note: Rank versus 133 countries; overall, Japan ranks 23rd in 2009 PPP adjusted GDP per capita and 21st in Global Competitiveness
Source: Institute for Strategy and Competitiveness, Harvard University (2010), based in part on survey data from the World Economic Forum.
20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 35 Copyright © 2011 Professor Michael E. Porter
Wage Level Comparison
Average Hourly Wage Selected Countries
(all employees), 2007
$60

Norway

Germany
$50
Denmark

Netherlands Austria
Finland
$40 Belgium
France
UK Switzerland
Ireland Australia
Sweden
Italy Canada
USA
$30 Luxembourg

Spain Japan

$20 New Zealand


Greece Korea
Israel Singapore

Hungary Portugal
$10
Argentina Czech Republic Taiwan
Brazil Slovakia
Poland Lithuania Hong Kong
Mexico
Philippines
Sri Lanka
$0
-1 Low -0.5 0
Global 0.5 Index Score, 2007
Competitiveness 1 1.5 High 2

Source: UK Department of Labor and Employment, 2009


20110208 MOC Session 3 – Japan Fax – FINAL – Tues Feb 8, 2011 36 Copyright © 2011 Professor Michael E. Porter