Transition Economies: Porter Model Comparisons
Maj Ryan Craycraft
Introduction
• Thesis
• Porter Model Explanation
• Case Studies– Russia– Poland– China
• Conclusion
Proposition
• If a country is to be successful in the global market economy, its domestic businesses must be competitive.
• IV: High levels of competitiveness
• DV: Successful Market Economy
Michael Porter’s Index
• Michael Porter, Harvard Business School has developed a competitive index– “The Current Competitiveness Index examines the
microeconomic bases of a nation’s GDP per capita.”
• Macroeconomic conditions are usually the object of study, but although necessary, they are not sufficient
• Microeconomic conditions are what actually create wealth and “sustainable productivity”
• Comparative in nature
Porter’s Model
• Like a business cycle, interactions among the previous activities help countries move along the macroeconomic country cycle
Porter’s Model
• Business Environment Diamond, aka “The Diamond”
(Consumers)
(Indirect Efficiencies)
(Supply Context)
(Nat’l Corporate Culture)
Poland
• Transition Plan:– Free Elections– Evolve to purely private economy– Create the Institutions of a capitalist economy
• Rapidly to market economy• Liberalize economic functions (int’l trade / FDI)• Privatization• Construct Social Safety Net• Mobilize Int’l Monetary Aid
Poland’s Successes
• Solid GDP Growth
• Stable currency
• Solid Manufacturing Sector
• Exports
• FDI
• Small / Medium business growth
Poland’s Challenges
• Poor Infrastructure
• Political Instability
• Small inflation (<5%)
• Social Safety Net in jeopardy
• Unemployment (esp. eastern Poland)
• Debt of 50% GDP (2004)
Poland in Porter’s Framework
• Moving from Factor Driven to Investment Driven
• Strong Manufacturing Sector, esp. automobiles due to relatively cheap, educated labor force
•Strong FDI
Poland in Porter’s Diamond
(Consumers
$14K PPP)
(Indirect Efficiencies)
(Supply Context)
(Nat’l Corporate Culture)
•Neutral Achievement
•Balanced Income and Competitiveness
Russia: A Middle Income Country
• Also a shock-therapy transition
• #1 CIS country, but behind E. Europe countries– No EU Charter guidance
Russia: Strengths
• Macroeconomic Stability (oil revenue)– 7th highest fiscal surplus in 2006
• Cold War capacities– Higher education– Research institutions spurring innovation– Cultural factors that support innovation
• Flexible labor market
Russia: Challenges
• Public institutions• Health factors
– Infant mortality– Life expectancy
• Petrodollars preventing necessary painful reforms
• Inflation near 10%• Technological readiness of business sector• Low intensity of domestic competition
Russia in Porter’s Framework
• Classified by WEF in the Efficiency-driven stage
• “Needs to focus on higher education and training, market efficiency and technological readiness”
• While continuing public institution reform
Russia in Porter’s Diamond
(Consumers
$12K PPP)
(Supporting Infrastructure)
(Mixed Bag)
(Low Competitiveness)
•Overachieving Country
•High Income compared to low competitiveness index
China: Commanded Transition
• Slow transition method
• Excess production allowed to go the open market
• When private enterprise failed, it was cancelled
• Government-controlled financial system
China: Strengths
• Macroeconomic indicators– High growth rates– Low inflation– High savings rate– Moderate public debt
China: Challenges
• State-controlled banking sector
• Low penetration of technology in industry
• Poor secondary / tertiary education system
• Public and Private institution quality– Turning to capital punishment for corruption– Burdensom government regulation– Poor property rights– Judiciary lacks independence
China in Porter’s Framework
• Moving from capture of cheap labor to need for efficiency to compete because cheap labor in other places
•Same as Russia’s recommendations:
• “Needs to focus on higher education and training, market efficiency and technological readiness”
• While continuing public institution reform
China in Porter’s Diamond
(Consumers
$7.5K PPP)
(Supporting Infrastructure)
(Macro indicators
Public Institutions)
(Low Technology)
•Underachieving Country
•Low Income compared to higher competitiveness index
Conclusion
• Transition from Factor-driven economy to Investment-driven economy has coincided with evolution from developing country to middle-income, developed country
• New challenge will be to move from Investment-driven to Innovation-driven in order to sustain growth
References
• Porter, Michael E. “Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index”
• Hunter, Richard J. and Leo V. Ryan, “A Transitional Analysis of the Polish Economy: After Fifteen Years, Still a ‘Work in Progress,” Global Economic Journal 5:2, 2005.
• Economist.com, Poland Country Briefing Factsheet,
• Marageta Drzeniek, “Russia’s Competitiveness at the Crossroads”, Paper presented at World Economic Forum Russia CEO Roundtable, June 2007, http://www.weforum.org/en/events/russia2007/index.htm
• Economist.com, China Country Briefing Factsheet,
• Porter, Michael E., World Economic Forum, World Competitiveness Report 2006-2007