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1 Copyright 2003 © Professor Michael E. PorterGCR Russia 2003 10-20-03.ppt

Russian Competitiveness:Where Do We Stand?

Professor Michael E. PorterInstitute for Strategy and Competitiveness

Harvard Business School

U.S.-Russian Investment SymposiumBoston, Massachusetts

13 November 2003

This presentation draws on ideas from Professor Porter’s 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 2003, (World Economic Forum, forthcoming 2003), “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 Porter’s work and the Institute for Strategy and Competitiveness is available at www.isc.hbs.edu


• Russia’s overall economic performance has improved since 1999 but is not exceptional relative to peer countries

• Recent progress has reflected clear improvements in macroeconomic policy and, to a lesser extent, the legal and corporate governance framework– However, much work still lies ahead

• Russia’s prosperity and prosperity growth still rely heavily on inherited wealth, not created wealth

• The critical challenge for Russia is now microeconomic: mobilizing its potential strengths and address its considerable weaknesses to dramatically raise the productivity of Russia as a place to do business

Russian Economic Performance 2003


Comparative Economic PerformanceReal GDP Growth Rates

-40%

-30%

-20%

-10%

0%

10%

20%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

AzerbaijanKazakhstanChinaS KoreaRussian FederationLatviaUkraineEstoniaUzbekistanBulgariaHungarySloveniaThailandLithuaniaFinlandRomaniaSlovakiaCroatiaPolandCzech RepublicBrazil

Source: EIU (2003)

Countries sorted by 1999-2002 annual real GDP growth rate (CAGR)Annual growth rate

of real GDP


0

20

40

60

80

100

120

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Russian GDP over time

Source: EIU (2003)

Real GDP, 1990 = 100

26% Gap


0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

-2% 0% 2% 4% 6% 8% 10%

Comparative Prosperity PerformanceSelected Countries

Russian Federation

Slovenia

Compound annual growth rate of real GDP per capita, 1996-2002

GDP per capita (PPP

adjusted) in US-$,

2002

Source: EIU (2003)

Czech Republic

HungarySlovakia

EstoniaPoland

CroatiaLatvia

Lithuania

Kazakhstan

AzerbaijanUkraine

UzbekistanMoldova

Serbia &Montenegro

RomaniaMalaysia Bulgaria

Thailand

South Africa

India

China

Brazil


What is Competitiveness?

• Competitiveness is determined by the productivity with which a nation uses its human, capital, and natural resources. Productivity sets a nation’s or region’s standard of living (wages, returns to capital, returns to natural resource endowments)

– Productivity depends both on the value of products and services (e.g. uniqueness, quality) as well as the efficiency with which they are produced.

– It is not what industries a nation competes in that matters for prosperity, but howfirms compete in those industries

– Productivity in a nation is a reflection of what both domestic and foreign firms choose to do in that location. The location of ownership is secondary for national prosperity.

– The productivity of “local” industries is of fundamental importance to competitiveness, not just that of traded industries

– Devaluation does not make a country more competitive

• Nations compete in offering 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 ProsperityInherited Prosperity

• Prosperity is derived from selling inherited natural resources or real estate

• Prosperity is limited by the amount of natural resources available, and is ultimately temporary

• Focus gravitates towards thedistribution of wealth as interest groups seek a bigger share of the pie

• Government is the central actor in the economy as the owner and distributor of wealth

• Prosperity is derived from selling inherited natural resources or real estate

• Prosperity is limited by the amount of natural resources available, and is ultimately temporary

• Focus gravitates towards thedistribution of wealth as interest groups seek a bigger share of the pie

• Government is the central actor in the economy as the owner and distributor of wealth

Created ProsperityCreated Prosperity

• Prosperity is derived from creating valuable products and services

• Prosperity is created by firms• Prosperity is unlimited, based only by

the innovativeness and productivity of companies in the economy

• Creating the conditions for productivity and innovation are the central policy question

• Companies are the central actors in the economy

• The government’s role is to create the enabling conditions

• Prosperity is derived from creating valuable products and services

• Prosperity is created by firms• Prosperity is unlimited, based only by

the innovativeness and productivity of companies in the economy

• Creating the conditions for productivity and innovation are the central policy question

• Companies are the central actors in the economy

• The government’s role is to create the enabling conditions


Microeconomic Foundations of DevelopmentMicroeconomic Foundations of Development

Quality of the Microeconomic

BusinessEnvironment

Quality of the Quality of the MicroeconomicMicroeconomic

BusinessBusinessEnvironmentEnvironment

Sophisticationof Company

Operations andStrategy

SophisticationSophisticationof Companyof Company

Operations andOperations andStrategyStrategy

Determinants of Productivity and Productivity Growth

Macroeconomic, Political, Legal, and Social Context for Development

Macroeconomic, Political, Legal, and Social Macroeconomic, Political, Legal, and Social Context for DevelopmentContext for Development

• A sound macroeconomic, political, legal, and social context creates the potential for competitiveness, but is not sufficient

• Competitiveness ultimately depends on improving the microeconomic capability of the economy and the sophistication of local companies and local competition


0.75

0.80

0.85

0.90

0.000 0.010 0.020 0.030 0.040 0.050 0.060

Russia

Argentina

Chile

Mexico

ThailandRomania

Slovenia

Poland

Colombia

Costa Rica

Change in Human Development Index, 2001 to 1995

Human Development Index, 2001

BelarusBulgaria

Latvia

Malaysia

Source: HDR (2003)

Croatia

Estonia

Brazil

Progress in Human DevelopmentSelected Countries

S Korea

Czech Rep.

HungaryLithuania

UkraineKazakhstan

Philippines Jamaica


Micro reform is needed

to raise the level of

sustainable prosperity

Macro reform alone can lead to short term capital inflows and growth spurts that ultimately are not sustainable

Integration of Macro- and Microeconomic Reforms

Macroeconomic reform

Microeconomic reform

Create opportunityfor productivity

Required to achieveproductivity

Productivity growth allows economic growth without inflation, making

macroeconomic stability easier to achieve

Stability and confidence support investment and upgrading


0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

-1% 0% 1% 2% 3% 4% 5% 6% 7% 8%

Comparative Labor ProductivitySelected Countries

Compound annual growth rate of real GDP per employee, 1996-2002

GDP per employee

(PPP adjusted) in US-$,

2002

Source: EIU (2003)

Slovenia

Russian Federation

Hungary

Czech Rep. Croatia Slovakia

PolandEstonia Lithuania

LatviaBulgaria

Kazakhstan

Ukraine

AzerbaijanUzbekistan

RomaniaBrazil

Mexico Chile

Serbia

China

S Korea

IndiaVietnam


0%

1%

2%

3%

4%

5%

6%

7%

8%

-1.0% -0.5% 0.0% 0.5% 1.0%

Russia’s average change in world goods export share:

- 0.10%

Russia’s average goods export share: 1.54%

Source: UNCTAD Trade Data. Author’s analysis.

Change in Russia’s World Export Share, 1997 - 2001

Russia’s Export Performance By Broad Sector1997-2001

Power Food/Beverages

Textiles Transportation

Multiple Business

DD

= $45 billion export volume in 2001

Petroleum/Chemicals

World Export Share, 2001

Entertainment

Materials/Metals

Forest Products


0%

10%

20%

30%

40%

50%

0% 10% 20% 30% 40% 50% 60%

Comparative Inward Foreign InvestmentSelected Economies

FDI Stocks as % of GDP, Average 1998-2000

FDI Inflows as % of Gross Fixed Capital Formation, Average 1998-2000

Sweden (18%, 89%)

Note: FDI Stocks and Inflows for transition countries are the average of 1998-2001Germany’s FDI inflows in this period were exceptionally high due to the Vodafone-Mannesmann takeover in 2000Source: World Investment Report 2002

Germany*

UK

US

Japan

China

Australia

New ZealandNetherlands

Italy

Spain

Finland

Latvia

Slovenia

Ukraine

Estonia

Czech Rep.

Argentina

Moldova

Hungary

BulgariaCroatia

LithuaniaSlovakia

SerbiaBelarus

Russian Federation

Romania Poland


Context for Firm

Strategy and Rivalry

Context for Context for Firm Firm

Strategy Strategy and Rivalryand Rivalry

Related and Supporting Industries

Related and Supporting Industries

Factor(Input)

Conditions

FactorFactor(Input) (Input)

ConditionsConditionsDemand

ConditionsDemand Demand

ConditionsConditions

Productivity and the Business Environment

• Successful economic development is a process of successive economic upgrading, in which the business environment in a nation evolves to support and encourage increasingly sophisticated ways of competing

Sophisticated and demandinglocal customer(s)Local customer needs that anticipate those elsewhereUnusual local demand in specialized segments that can be served regionally and globally

Presence of high quality, specialized inputs available to firms

–Human resources–Capital resources–Physical infrastructure–Administrative infrastructure–Information infrastructure–Scientific and technological

infrastructure–Natural resources

Access to capable, locally based suppliersand firms in related fieldsPresence of clusters instead of isolated industries

A local context and rules that encourage investment and sustained upgrading

–e.g., Intellectual property protection

Meritocratic incentive system across institutionsOpen and vigorous competition among locally based rivals


Clusters and CompetitivenessHouston Oil and Gas Products and Services Cluster

Equipment Suppliers

(e.g. Oil Field Chemicals,

Drilling Rigs, Drill Tools)

Specialized Institutions (e.g. Academic Institutions, Training Centers, Industry Associations)

GasProcessing

GasTrading

GasTransmis-

sion

GasDistribution

GasMarketing

Oil & Gas Completion &

Production

Oil & GasExploration & Development

Oilfield Services/Engineering & Contracting Firms

OilRefining

OilDistribution

OilWholesaleMarketing

Oil Retail

Marketing

SpecializedTechnology Services

(e.g. Drilling Consultants,

Reservoir Services, Laboratory Analysis)

Subcontractors

(e.g. Surveying,Mud Logging,

Maintenance Services)

BusinessServices

(e.g. MIS Services,Technology Licenses,

Risk Management)

OilTrading

OilTrans-

portation

GasGathering


Leading Footwear Clusters

Vietnam/Indonesia• OEM Production • Focus on the low cost

segment mainly for the European market

China• OEM Production• Focus on low cost

segment mainly for the US market

Portugal• Production • Focus on short-

production runs in the medium price range

Romania• Production subsidiaries

of Italian companies• Focus on lower to

medium price range

United States• Design and marketing • Focus on specific market

segments like sport and recreational shoes and boots

• Manufacturing only in selected lines such as hand-sewn casual shoes and boots

Source: Research by HBS student teams in 2002

Italy• Design, marketing,

and production of premium shoes

• Export widely to the world market


Institutions for CollaborationSelected Massachusetts Organizations, Life Sciences

Economic Development InitiativesEconomic Development Initiatives

Massachusetts Technology CollaborativeMass Biomedical InitiativesMass DevelopmentMassachusetts Alliance for Economic Development

Massachusetts Technology CollaborativeMass Biomedical InitiativesMass DevelopmentMassachusetts Alliance for Economic Development

Life Sciences Industry AssociationsLife Sciences Industry Associations

Massachusetts Biotechnology CouncilMassachusetts Medical Device Industry CouncilMassachusetts Hospital Association

Massachusetts Biotechnology CouncilMassachusetts Medical Device Industry CouncilMassachusetts Hospital Association

General Industry AssociationsGeneral Industry Associations

Associated Industries of MassachusettsGreater Boston Chamber of CommerceHigh Tech Council of Massachusetts

Associated Industries of MassachusettsGreater Boston Chamber of CommerceHigh Tech Council of Massachusetts

University InitiativesUniversity Initiatives

Harvard Biomedical CommunityMIT Enterprise ForumBiotech Club at Harvard Medical SchoolTechnology Transfer offices

Harvard Biomedical CommunityMIT Enterprise ForumBiotech Club at Harvard Medical SchoolTechnology Transfer offices

Informal networksInformal networks

Company alumni groupsVenture capital communityUniversity alumni groups

Company alumni groupsVenture capital communityUniversity alumni groups

Joint Research InitiativesJoint Research Initiatives

New England Healthcare InstituteWhitehead Institute For Biomedical ResearchCenter for Integration of Medicine and Innovative Technology (CIMIT)

New England Healthcare InstituteWhitehead Institute For Biomedical ResearchCenter for Integration of Medicine and Innovative Technology (CIMIT)


0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Global Competitiveness Report 2003The Relationship Between Business Competitiveness and GDP Per Capita

USA

SwitzerlandGermanyUK

Denmark

Singapore

New Zealand

Taiwan

Norway

Iceland

Ireland

Greece Israel

Italy

S Korea

Hungary

India

Canada

SpainCzech Rep

Slovenia

Portugal

Business Competitiveness Index

2002 GDP per Capita

(Purchasing Power Adjusted)

BrazilMalaysia

China

Russian Federation

VietnamJordan

UruguayArgentina South Africa

Note: Other central European countries in blue Source: Global Competitiveness Report 2003

Estonia

Thailand

FinlandSweden

Malta

TanzaniaKenya

Austria

Paraguay

Croatia

Slovak Rep.

LatviaPoland Lithuania

BulgariaRomania Ukraine

Serbia

y = 2002.2x2 + 8427.7x + 9514.9

R2 = 0.8266


Russia’s Competitive Promise

Note: Rank by countries; overall Russia ranks 65 (63 on National Business Environment, 48 on GDP pc 2002)Source: Global Competitiveness Report 2003

Human ResourcesQuality of Math and Science Education 18Quality of Educational System 38Quality of Public Schools 41Cooperation in Labor-Employer Relations 41

Science and Technology BaseQuality of Scientific Research Institutions 25Availability of Scientists and Engineers 26

Competitive Advantages Relative to GDP per Capita

Country Ranking, Arrows indicate a change of 5 or more

ranks since 1998

20 Copyright 2003 © Professor Michael E. PorterGCR Russia 2003 10-20-03.pptSource: US Patent and Trademark Office (www.uspto.gov). Author’s analysis.

Annual U.S. patents per 1 million

population, 2001

Compound annual growth rate of US-registered patents, 1990 - 2001

International Patenting OutputSelected Countries

0

50

100

150

200

250

300

350

400

0% 10% 20% 30% 40%

Australia

Canada

Germany

Japan

South Korea

New Zealand

Singapore

Sweden

Taiwan

UK

Israel= 10,000 patents granted in 2001

USA

Finland

Ireland

Russia


Note: Other Latin American countries have negligible rates of US patenting Source: US Patent and Trademark Office (www.uspto.gov). Author’s analysis.

Annual U.S. patents per 1 million population, 2001

Compound annual growth rate of US-registered patents, 1996 - 2001

International Patenting OutputSelected Transition Countries

= 100 patents granted in 2001

Hungary

Russian Federation

Average Growth Rate of Countries shown: 11.1%

AveragePatents per Capita for Countries shown: 1.9

Slovenia

Serbia & Mont.

Czech Rep.

BulgariaRomaniaUkrainePoland

EstoniaSlovakia

0.0

2.0

4.0

6.0

8.0

10.0

12.0

-10% 0% 10% 20% 30%Uzbekistan


Barriers to Structural Change in the Russian Economy

• Competition– Russia scores low in the Global Competitiveness Report on

trade liberalization and non-tariff barriers– Russia scores low on the level of domestic competition– Competition is hampered and distorted by corruption and

administrative inefficiencies

• Entry and exit– Russia has low formal barriers to entry, but business leaders

report significant burdens for start-ups– Russia has high formal barriers for firing employees and

closing businesses, but business leaders report them as non-binding in practice

• Financial market– Russian financial markets get low scores for providing

sophisticated services and credit to companies




Physical InfrastructureRailroad Infrastructure Quality 17Port Infrastructure Quality 42



ranks since 1998

Russian CompetitivenessCompetitive Advantages and Disadvantages

Openness and Vitality of CompetitionForeign Ownership of Companies 93Intensity of Local Competition 83Hidden Trade Barrier Liberalization 79Adequacy of Public Sector Legal Recourse78Tariff Liberalization 76Effectiveness of Anti-Trust Policy 73Extent of Distortive Government Subsidies 70Efficacy of Corporate Boards 64

Administrative Efficiency and TransparencyExtent of Bureaucratic Red Tape 89Police Protection of Businesses 80Favoritism in Decisions of Government 74 Officials Judicial Independence 74Business Costs of Corruption 53

Competitive Disadvantages Relative to GDP per Capita


ranks since 1998



-10 -5 0 5 10 15

CorruptionTransparency International Global Corruption Report

Ukraine

Hungary

KazakhstanAzerbaijan

Romania

BulgariaLatvia

Uzbekistan

Slovak Rep.Poland

Lithuania

Czech Rep.

SloveniaEstonia

Russia

Note: Eastern European and CIS countries in blue, constant country sampleSource: Global Corruption Report, 2003

Change in Rank, Global Corruption Report, 2003 versus 2001

Rank in Global

CorruptionIndex,2003

66

ChinaTurkey




Physical InfrastructureRailroad Infrastructure Quality 17Port Infrastructure Quality 42



ranks since 1998

Russian CompetitivenessCompetitive Advantages and Disadvantages (Continued)

Efficiency of Financial MarketsProtection of Minority Shareholders 94Regulation of Securities Exchanges 86Financial Market Sophistication 84Existence of Bankruptcy Law 82Ease of Access to Loans 72Local Equity Market Access 70Venture Capital Availability 60

Quality of the Regulatory EnvironmentIntellectual Property Protection 85Laws Relating to Information Technology 71Stringency of Environmental Regulations 70

Competitive Disadvantages Relative to GDP per Capita


ranks since 1998



The Costa Rica Information Technology Cluster

Source: Niels Ketelhohn research for Professor Michael E. Porter

Electronic Assembly

Semiconductor Production

PassiveElectronic Components (e.g., inductors, transistors)

Other Electronic Components

(e.g., circuitboards)

Venture Capital FirmsVenture Capital Firms

Computer Software (e.g., ArtinSoft)

Computer Software (e.g., ArtinSoft)

Specialized Academic and Training Institutions

(e.g., Instituto Tecnológico de Costa Rica, Instituto Nacional de Aprendizaje)

Specialized Academic and Training Institutions

(e.g., Instituto Tecnológico de Costa Rica, Instituto Nacional de Aprendizaje)

State Government Agencies (e.g., export and investments promotion

agencies: Cinde and Procomer)

State Government Agencies (e.g., export and investments promotion

agencies: Cinde and Procomer)

Specialized ChemicalsSpecialized Chemicals

Specialized Packaging (e.g., plastics, corrugated

materials)

Specialized Packaging (e.g., plastics, corrugated

materials)


Legacies of a Planned-Economy

Legacies of a Planned-Economy

• Economic policy is centrallydirected

• Buyer/supplier linkages seen from a national perspective

• Relationships between suppliers and buyers are specified and focused on production of defined goods and services

• The geographic locations of related economic activities driven by political and security considerations

• Economic policy is centrallydirected

• Buyer/supplier linkages seen from a national perspective

• Relationships between suppliers and buyers are specified and focused on production of defined goods and services

• The geographic locations of related economic activities driven by political and security considerations

Cluster-based EconomyCluster-based Economy

• Economic policy involves significant autonomy and institutions at the regional and local level

• There is specialization of regions across the fields in which they compete

• Externalities across firms and institutions in clusters facilitate productivity and dynamism

• Geographic choices are based on the economic attractiveness of locations; firms co-locate with others to reap cluster benefits

• Economic policy involves significant autonomy and institutions at the regional and local level

• There is specialization of regions across the fields in which they compete

• Externalities across firms and institutions in clusters facilitate productivity and dynamism

• Geographic choices are based on the economic attractiveness of locations; firms co-locate with others to reap cluster benefits

Creating a Productive Economic Structure


$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

1995 1996 1997 1998 1999 20000%

1%

2%

3%

4%

5%

6%

7%

8%

ValueMarket Share

The Australian Wine ClusterTrade Performance

Source: UN Trade Statistics

Australian Wine Exports in million US

Dollars

Australian Wine World Export Market

Share


The Australian Wine ClusterHistory

1955

Australian Wine Research Institute founded

1970

Winemaking school at Charles Sturt University founded

1980

Australian Wine and Brandy Corporation established

1965

Australian Wine Bureau established

1930

First oenology course at Roseworthy Agricultural College

1950s

Import of European winery technology

1960s

Recruiting of experienced foreign investors, e.g. Wolf Bass

1990s

Surge in exports and international acquisitions

1980s

Creation of large number of new wineries

1970s

Continued inflow of foreign capital and management

1990

Winemaker’s Federation of Australia established

1991 to 1998

New organizations created for education, research, market information, and export promotions

Source: Michael E. Porter and Örjan Sölvell, The Australian Wine Cluster – Supplement, Harvard Business School Case Study, 2002


Cluster Policy versus Industrial Policy

Industrial Policy

Industrial Industrial PolicyPolicy

Cluster-basedPolicy

ClusterCluster--basedbasedPolicyPolicy

• Target desirable industries / sectors

• Focus on domestic companies

• Intervene in competition (e.g., protection, industry promotion, subsidies)

• Centralizes decisions at the national level

• All clusters can contribute to prosperity

• Domestic and foreign companies both enhance productivity

• Relax impediments and constraints to productivity

• Emphasize cross-industry linkages / complementarities

• Encourage initiative at the state and local level

Distort competition Enhance competition


The Role of Clusters in Economic DevelopmentOverview

• Clusters are critical engines in the economic structure of national and regional economies– The health of their cluster determines the level of productivity companies

can reach– Regional prosperity depends on significant positions in a number of

competitive clusters

• Clusters can identify fundamental challenges in the national or regional business environment

– Clusters are more aligned with the nature of competition and themicroeconomic factors that influence competitive advantage

– At the economy-wide level, only generic topics like taxes and trade protection are of joint interests to all companies

• Clusters provide a new way of thinking about an economy and organizing economic development efforts

– Recast the role of the private sector, government, trade associations and educational or research institutions

– Brings together firms of all sizes to identify common opportunities, not just common problems


Influences on CompetitivenessMultiple Geographic Levels

Broad Economic AreasBroad Economic Areas

Groups of Neighboring Groups of Neighboring NationsNations

States, ProvincesStates, Provinces

Cities, Metropolitan Cities, Metropolitan AreasAreas

NationsNations

World EconomyWorld Economy


Specialization of Regional EconomiesSelect U.S. Geographic Areas

BostonAnalytical InstrumentsEducation and Knowledge CreationCommunications Equipment

BostonAnalytical InstrumentsEducation and Knowledge CreationCommunications Equipment

Los Angeles AreaApparelBuilding Fixtures,

Equipment and Services

Entertainment

Los Angeles AreaApparelBuilding Fixtures,

Equipment and Services

Entertainment

ChicagoCommunications EquipmentProcessed FoodHeavy Machinery

ChicagoCommunications EquipmentProcessed FoodHeavy Machinery

Denver, COLeather and Sporting GoodsOil and GasAerospace Vehicles and Defense

Denver, COLeather and Sporting GoodsOil and GasAerospace Vehicles and Defense

San DiegoLeather and Sporting GoodsPower GenerationEducation and Knowledge Creation

San DiegoLeather and Sporting GoodsPower GenerationEducation and Knowledge Creation

San Francisco-Oakland-San Jose Bay AreaCommunications EquipmentAgricultural ProductsInformation Technology

San Francisco-Oakland-San Jose Bay AreaCommunications EquipmentAgricultural ProductsInformation Technology

Seattle-Bellevue-Everett, WAAerospace Vehicles and DefenseFishing and Fishing ProductsAnalytical Instruments

Seattle-Bellevue-Everett, WAAerospace Vehicles and DefenseFishing and Fishing ProductsAnalytical Instruments

HoustonHeavy Construction ServicesOil and GasAerospace Vehicles and Defense

HoustonHeavy Construction ServicesOil and GasAerospace Vehicles and Defense

Pittsburgh, PAConstruction MaterialsMetal ManufacturingEducation and Knowledge

Creation

Pittsburgh, PAConstruction MaterialsMetal ManufacturingEducation and Knowledge

Creation

Atlanta, GAConstruction MaterialsTransportation and LogisticsBusiness Services

Atlanta, GAConstruction MaterialsTransportation and LogisticsBusiness Services

Raleigh-Durham, NCCommunications EquipmentInformation TechnologyEducation andKnowledge Creation

Raleigh-Durham, NCCommunications EquipmentInformation TechnologyEducation andKnowledge Creation

Wichita, KSAerospace Vehicles and

DefenseHeavy MachineryOil and Gas

Wichita, KSAerospace Vehicles and

DefenseHeavy MachineryOil and Gas

Note: Clusters listed are the three highest ranking clusters in terms of share of national employmentSource: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School


U.S. Patenting by Russian Institutions

Note: Shading indicates universities, research institutions, and other government agencies Source: US Patent and Trademark Office (www.uspto.gov). Author’s analysis.

0

1

2

0

0

3

0

3

0

1

0

3

1

1

4

3

1

0

1

8

1998

0

0

1

0

0

0

0

2

0

1

0

4

2

0

0

4

0

0

1

5

1997

0

0

0

0

0

0

0

0

0

2

0

3

2

0

0

4

0

0

0

1

1996

2

1

0

3

0

1

0

0

1

1

0

0

0

4

5

2

6

0

2

13

1999

3

3

1

1

1

2

1

0

3

4

8

0

3

0

2

2

4

2

10

2

2000

0

0

1

1

4

0

5

2

3

0

1

0

2

6

1

0

7

16

9

1

2001

5SAWTEK, INC.

5MCDONNELL DOUGLAS CORP.

5QUANTA VISION, INC.

5TCI INC.

5ALM DEVELOPMENT, INC.

6

6

7

7

9

9

10

10

11

12

15

18

18

23

30

Patents Issued1996-2001

CYTRAN, INC.

LSI LOGIC CORPORATION

ALARIS INC.

ADVANCED ION TECHNOLOGY, INC.

GENERAL ELECTRIC COMPANY

RENAL TECH INTERNATIONAL LLC

SOCIETE NATIONALE INDUSTRIELLE AEROSPATIALE

AJINOMOTO COMPANY INCORPORATED

ELBRUS INTERNATIONAL LTD.

UNIVERSITY OF CHICAGO

CERAM OPTEC INDUSTRIES, INC.

R-AMTECH INTERNATIONAL, INC.

NPO ENERGOMASH

SAMSUNG ELECTRONICS CO., LTD.

SUN MICROSYSTEMS, INC.

Organization


InnovativeCapacity Index

Scientists &Engineers

Index

Linkages Index ClusterEnvironment

Index

Operations &Strategy Index

InnovationPolicy Index

Innovative Capacity IndexRussia’s Relative Position

Source: Global Competitiveness Report 2003

Russia’s GDP per Capita Rank 48

Russia’s Competitiveness Rank 65

1

10

20

30

40

50

60

70

80

39

9

40

55

67 75


• Russia faces challenges in attracting traditional manufacturing investments given the inefficiencies in its business environment relative to other locations

• Near term opportunities should focus where Russia is most unique

• Improve the innovation policy environment– Intellectual property right protection

• Create Technology Parks and R&D Free Zones– Simplified administrative rules

• Support cluster-development efforts around universities– Technology transfer offices– Recruiting foreign companies– Incubators

Leveraging the Russian Technology BaseIllustrative Strategic Options


Shifting Responsibilities for Economic Development

Old ModelOld Model

• Government drives economic development through policy decisions and incentives

• Government drives economic development through policy decisions and incentives

New ModelNew Model

• Economic development is a collaborative process involving government at multiple levels, companies, teaching and research institutions, and institutions for collaboration

• Economic development is a collaborative process involving government at multiple levels, companies, teaching and research institutions, and institutions for collaboration


• Improve the macroeconomic, political, legal, and social context– Establish a stable and predictable macroeconomic, legal, and political

environment – Improve the social conditions of citizens

• Upgrade the general business environment– Improve the availability, quality, and efficiency of cross-cutting or general

purpose inputs, infrastructure, and institutions– Set overall rules and incentives governing competition that encourage

productivity growth

• Facilitate cluster formation and upgrading– Identify existing and emerging clusters– Convene and participate in the identification of cluster constraints and action

plans to address them

• Lead a collaborative process of economic change– Create institutions and processes for upgrading competitiveness that inform

citizens and mobilize the private sector, government at all levels, educational and other institutions, and civil society to take action

Roles of Government in Economic Development


Role of the Private Sector in Economic Development

• Take an active role in upgrading the local infrastructure

• Nurture local suppliers and attract new supplier investments

• Work closely with local educational and research institutions to upgrade quality and create specialized programs addressing cluster needs

• Provide government with information and substantive input 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

– Cost sharing


Russia’s Competitiveness Agenda

• Raise the productivity of the Russian business environment

• Adopt a cluster-based approach to economic development

• Push economic strategy to the regional level

• Shift the roles of government, business, and other institutions in economic development

• Raise the productivity of the Russian business environment

• Adopt a cluster-based approach to economic development

• Push economic strategy to the regional level

• Shift the roles of government, business, and other institutions in economic development

• Creating the microeconomic foundations of sustainable prosperity in Russia


Selected References on Clusters, Competition, Innovation, and Regional Economies

Professor Michael E. Porter

• “The Economic Performance of Regions”, Regional Studies, Vol. 37, 2003

• “UK Competitiveness: Moving to the Next Stage”, with Christian Ketels, DTI Economics Papers, No.3, London: 2003

• “The Competitive Advantage of Corporate Philanthropy,” with Mark Kramer, Harvard Business Review, December 2002

• “Building the Microeconomic Foundations of Prosperity: Findings from the Microeconomic Competitiveness Index” in The Global Competitiveness Report 2002-03, New York: Oxford University Press, New York: Oxford University Press, 2002

• “Clusters of Innovation Initiative: Research Triangle Report,” (with the Council on Competitiveness, Monitor Group, and ontheFRONTIER), Washington, DC: Council on Competitiveness, 2002

• “Clusters of Innovation Initiative: Pittsburgh Report,” (with the Council on Competitiveness, Monitor Group, and ontheFRONTIER), Washington, DC: Council on Competitiveness, 2002

• “Clusters of Innovation Initiative: Atlanta Report,” (with the Council on Competitiveness, Monitor Group, and ontheFRONTIER), Washington, DC: Council on Competitiveness, 2002

• “Clusters of Innovation Initiative: Wichita Report,” (with the Council on Competitiveness, Monitor Group, and ontheFRONTIER), Washington, DC: Council on Competitiveness, 2002

• “Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index” in The Global Competitiveness Report 2001-02, New York: Oxford University Press, 2001


• “U.S. Competitiveness 2001,” with Debra van Opstal, Washington, DC: Council on Competitiveness, 2001

• “Innovation Lecture,” published by the Dutch Ministry of Economics, 2001

• “National Report: Clusters of Innovation Initiative,” (with the Council on Competitiveness, Monitor Group, and ontheFRONTIER), Washington, DC: Council on Competitiveness, 2001

• “Clusters of Innovation Initiative: San Diego Report,” (with the Council on Competitiveness, Monitor Group, and ontheFRONTIER), Washington, DC: Council on Competitiveness, 2001

• “The Current Competitiveness Index: Measuring the Microeconomic Foundations of Prosperity” in The Global Competitiveness Report 2000-01, New York: Oxford University Press, 2000

• “Location, Competition, and Economic Development: Local Clusters in a Global Economy,” (Economic Development Quarterly, February 2000, 15-34)

• “Locations, Clusters, and Company Strategy” in The Oxford Handbook of Economic Geography, (G. L. Clark, M.P. Feldman, and M.S. Gertler, eds.), New York: Oxford University Press, 2000

• “Attitudes, Values, Beliefs and the Microeconomics of Prosperity,” in Culture Matters: How Values Shape Human Progress, (L.E. Harrison, S.P. Huntington, eds.), New York: Basic Books, 2000

• “Clusters and the New Competitive Agenda for Companies and Governments” in On Competition, Boston: Harvard Business School Press, 1998

• The Competitive Advantage of Nations, New York: The Free Press, 1990

Selected References on Clusters, Competition, Innovation, and Regional Economies

Professor Michael E. Porter

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