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1 Copyright 2009 © Professor Michael E. PorterCompetitiveness Master - 2009-04-20.ppt

Turkey’s Competitiveness: National Economic Strategy and the Role of Business

Professor Michael E. PorterInstitute for Strategy and Competitiveness

Harvard Business School

Istanbul, Turkey16 October 2009

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, 2008) and ongoing research at the Institute for Strategy 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, Version: October 14, 2009 (6:30pm)


Agenda

• Turkey’s Economic Performance

• Principles of Competitiveness

• Assessment of Turkey’s Competitive Position

• Towards an Economic Strategy


$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Turkey’s Prosperity Performance

Note: PPP using EKS calculation methodology. Source: Groningen Growth and Development Centre, Total Economy Database (June 2009)

GDP per Capita(in 2008 PPP US$)

CAGR:

+3.27%

CAGR:

+3.27%CAGR:

+4.74%

CAGR:

+4.74%CAGR:

+2.57%

CAGR:

+2.57%

2008


$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

0% 5% 10% 15% 20%

PPP-adjusted GDP per Capita, 2008 ($USD)

Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2001 to 2008Source: EIU (2009), authors calculations

Bahrain

China

Vietnam

South Africa

Latvia

Germany

Oman

Croatia

Czech Republic

Saudi Arabia

Thailand

Estonia

Russia

Lebanon

Yemen

UAE

France

Brazil

SyriaIndia

Turkey

Egypt

Lithuania

Israel

Slovakia

Hungary

Iran

Mexico

Slovenia

Jordan

Chile

Other countriesNeighboring countries

Prosperity PerformanceSelected Middle and Upper Middle Income Countries

Malta

Greece

Korea

Italy

Japan

Spain

Poland

Ukraine

Georgia

Azerbaijan

Armenia

Bulgaria

Tunisia

Pakistan

Cyprus

New Zealand

Bosnia

BelarusMalaysia

Colombia

Kazakhstan

LibyaPanama

Portugal

Romania

Argentina


0%

2%

4%

6%

8%

10%

12%

14%

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

Unemployment PerformanceSelected Middle and Upper Middle Income CountriesUnemployment

Rate, 2008

Change in Unemployment Rate in Percentage Points, 1999-2008Note: In some cases, 1999 data was unavailable, so 2000 data used.Source: EIU (2009)

Improving Deteriorating

France

Malta

Greece

Hong Kong

Germany

Italy

Tunisia

SwedenLithuania

South Korea

Czech Republic

Poland

Estonia

Mexico

Slovenia

USA

Malaysia

Portugal

New Zealand Japan

HungaryPhilippines

China

Turkey

Slovakia

Australia

Indonesia

Canada

Spain

Thailand

Brazil

RussiaIndia

Chile

Sri Lanka

Singapore

Romania

Bulgaria

Egypt

South Africa (22.9%)

Croatia

Saudi Arabia

VietnamLatvia

Pakistan

Argentina (-14.6%)

Morocco

Switzerland

Austria

Ireland

Netherlands

Finland Israel

Denmark

Albania Iran

Colombia

Syria

Kazakhstan

Ukraine

Azerbaijan

6 Copyright 2009 © Professor Michael E. PorterCompetitiveness Master - 2009-04-20.pptSource: Economist Intelligence Unit (2009)

Labor Force UtilizationParticipation Rates, Selected Countries

25%

30%

35%

40%

45%

50%

55%

60%

65%

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

Labor Force Participation Rate, 2008

Change in Labor Force Participation Rate, 2001 to 2008

Germany

Korea

Mexico

Slovenia

USA

Pakistan

Japan

Turkey

Slovakia

AustraliaDenmark

Brazil

Indonesia

China

ArgentinaPhilippines

RussiaVietnam

India

Malaysia

Chile

Thailand

Croatia

Lithuania

Tunisia BulgariaSouth Africa

EgyptLibya

Saudi Arabia

Colombia

Ghana

Cote d’Ivoire

Romania

KuwaitSingapore

Iceland

Macedonia

IrelandSpain

LatviaCyprusEstonia

Ukraine

Moldova (-4.98%)

IsraelHungary

Austria Greece

Netherlands

Italy

Canada

New ZealandFinland

UAE

YemenSyria Jordan

Iran

France Poland

Portugal

Switzerland

Kazakhstan

Azerbaijan (66.4%)

Bahrain

Belgium

Czech Rep.


Turkey’s Export Share Trends

Source: WTO (2009)

World Export Market Share

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Processed GoodsSemi-processed GoodsUnprocessed GoodsServicesTOTAL


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

-15% -10% -5% 0% 5% 10% 15% 20%

Export PerformanceSelected Middle and Upper Middle Income Countries

Exports of Goods and Services (% of GDP), 2008

Change in Exports of Goods and Services (% of GDP), 2001 to 2008

Russia

Thailand

Jordan

Estonia

China

Germany

Philippines

UK

Cyprus

South Africa

Ireland (-18.4%)

USA

India

Romania

Brazil

Cambodia

Chile

FranceIndonesia

Australia

Czech Rep.

Greece

Slovakia

Turkey

Mexico

Korea

Pakistan

Argentina

Vietnam

Malaysia (103.5%)

Canada

Hungary

Croatia

Source: EIU (2008), authors’ analysis

Japan

Netherlands

Egypt (27.2%)

Bangladesh

Poland

New Zealand

Slovenia

Denmark

Albania

Lithuania

Ukraine

BelarusBulgaria

Finland Iceland

Malta

Yemen

United Arab Emirates

Qatar

Syria

KuwaitOman

LebanonIran

Kazakhstan

Israel

Armenia

Belgium

Georgia

LatviaMoldova

Spain Italy

AustriaSwitzerland

Saudi Arabia (31.2%)

Azerbaijan (35.3%)Vietnam (25%)


0%

10%

20%

30%

40%

50%

60%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Inbound Foreign Investment PerformanceStocks and Flows, Selected Countries

Source: UNCTAD, World Investment Report (2009)

Inward FDI Stocks as % of GDP, Average 1990-2008

FDI Inflows as % of Gross Fixed Capital Formation, Average 1990 - 2008

Japan

Russia

Saudi Arabia

Turkey

Slovenia

Jordan

Hungary

Vietnam

Slovakia

Czech RepublicKazakhstan

Chile Netherlands

Poland

Estonia

Malaysia

CroatiaSouth Africa

New Zealand

Indonesia ChinaUkraine

Lithuania

Lebanon

Brazil

Bulgaria

Korea

AustriaLatvia

Switzerland

Spain

Kazakhstan

Mexico

Portugal

Philippines

Greece

Romania

CyprusEgypt

Oman

BelarusUAE

Qatar

Syria

Thailand

Georgia (60.1%)

IndiaIran

Bahrain

Malta

Turkey (1990-2000)

Turkey (2001-2008)

BosniaGeorgia

Macedonia

Cambodia


0

1

2

3

4

5

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

Note: Blue shaded countries have similar GDP per capita to Turkey. Source: USPTO (2008), EIU (2008)

Average U.S. patents per 1 million population, 2004-2008

CAGR of US-registered patents, 2004 – 2008

Innovative CapacityInnovation Output of Selected Countries

Saudi Arabia

RussiaPortugal

TurkeyIndia

Poland

Kuwait

Czech Republic

China

South Africa

UAE

Greece

Indonesia

Hungary

Cyprus

120 patents =

Argentina

Brazil

Croatia

Malaysia

Bulgaria

PhilippinesEgypt

Chile

Lebanon

Thailand

UkraineRomania

Mexico

Colombia


Strategic Issues Facing Turkey in 2009

• There have been significant policy improvements since 2001, such as opening the economy to trade and competition, streamlining regulations, and improving infrastructure

• However, the slowdown of reforms during 2008 exposed Turkey to the brunt of the global crisis

– Investors and consumers are still wary given Turkey’s historical track record

• Improving Turkey’s future economic performance will require addressing numerous challenges

– Turkey has only reached the first stage in becoming a truly competitive economy

• Second stage reforms are considerably more challenging

• Turkey needs a coherent economic strategy in order to continue its progress

• The private and the public sector must collaborate in order to take the economy to the next level


Agenda






What is Competitiveness?

• 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

• 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)

– 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

– Relentless innovation in technology, products, and organizational methods is necessary to drive productivity growth and a rising standard of living


Macroeconomic Competitiveness

Microeconomic Competitiveness

Sophisticationof Company

Operations andStrategy

Quality of the NationalBusiness

Environment

MacroeconomicPolicies

SocialInfrastructure and PoliticalInstitutions

State of Cluster Development

• 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

Determinants of Competitiveness

Natural Endowments




Microeconomic CompetitivenessSophisticationof Company



Environment



Natural Endowments

• Human Development: basic education and health care

• Rule of Law: property rights and due process

• Political Institutions: stable and effective political and governmental processes and organizations








Environment



Natural Endowments



• Fiscal policy: public spending aligned with revenues over time

• Monetary policy: low levels of inflation

• Macroeconomic management: avoiding structural imbalances and cyclical overheating

MacroeconomicPolicy






Environment



Natural Endowments



• The internal skills, capabilities, and management practices needed to attain the highest level of company productivity and innovation possible

Sophisticationof Company




• The general external business environment conditions that allow companies to reach high levels of productivity and innovation

Quality of the National Business

Environment Macroeconomic Competitiveness




Environment



Natural Endowments




• The depth of specialized skills and assets and the ability to capture synergies across related firms and industries






Environment



Natural Endowments



Quality of the Business Environment

Context for Firm

Strategy and Rivalry

Context for Firm


Related and Supporting Industries


Factor(Input)

Conditions

Factor(Input)

ConditionsDemand

ConditionsDemand

Conditions

• Sophisticated and demanding local customers and needs

– e.g., Strict quality, safety, and environmental standards

– Consumer protection laws

• 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

• Efficient access to high quality business inputs

– Efficient utilization of natural endowments

– Human resources– Capital availability– Physical infrastructure– Administrative and information

infrastructure (e.g. registration, permitting, transparency)

– Scientific and technological infrastructure

• Availability of suppliers , supporting industries and institutions, and firms in related fields

Open and vigorous local competition

– Openness to foreign competition– Competition laws

• Local rules and incentives that encourage investment and productivity

– e.g. incentives for capital investment, intellectual property protection, corporate governance standards


Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden

HotelsHotels

Attractions andActivities

e.g., theme parks, casinos, sports

Attractions andActivities

e.g., theme parks, casinos, sports

Airlines, Cruise Ships

Airlines, Cruise Ships

Travel agentsTravel agents Tour operatorsTour operators

RestaurantsRestaurants

PropertyServicesPropertyServices

MaintenanceServices

MaintenanceServices

Government agenciese.g. Australian Tourism Commission,

Great Barrier Reef Authority

Government agenciese.g. Australian Tourism Commission,

Great Barrier Reef Authority

Educational Institutionse.g. James Cook University,

Cairns College of TAFE

Educational Institutionse.g. James Cook University,

Cairns College of TAFE

Industry Groupse.g. Queensland Tourism

Industry Council

Industry Groupse.g. Queensland Tourism

Industry Council

FoodSuppliers

FoodSuppliers

Public Relations & Market Research

Services

Public Relations & Market Research

Services

Local retail, health care, andother services

Local retail, health care, andother services

Souvenirs, Duty Free

Souvenirs, Duty Free

Banks,Foreign

Exchange

Banks,Foreign

Exchange

Local Transportation

Local Transportation

State of Cluster DevelopmentTourism Cluster in Cairns, Australia


Development of the Australian Wine Cluster

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 RoseworthyAgricultural 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 collective 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


Develop Related ClustersDevelop Related Clusters

Upgrade Existing Export Products and Services


Clusters and Economic Diversification

Deepen Existing ClustersDeepen Existing Clusters

Turn Products Into ClustersTurn Products Into Clusters• Local firms• MNCs


The Evolution of Regional EconomiesSan Diego

U.S. Military

U.S. Military

CommunicationsEquipment

Sporting Goods

Analytical Instruments

Power Generation

Aerospace Vehiclesand Defense

Transportationand Logistics

Information Technology

19101910 19301930 19501950 1990199019701970

Bioscience Research Centers

Bioscience Bioscience Research Research CentersCenters

Climate and

Geography

Climate and

Geography

Hospitality and Tourism

Medical Devices

Biotech / Pharmaceuticals

Education andKnowledge Creation


FurnitureBuilding Fixtures,

Equipment & Services

Fishing & Fishing Products

Hospitality & TourismAgricultural

Products

Transportation & Logistics

Clusters and Economic DiversificationLinkages Across Clusters

Plastics

Oil & Gas

Chemical Products

Biopharma-ceuticals

Power Generation

Aerospace Vehicles &

Defense

Lightning & ElectricalEquipment

Financial Services

Publishing & Printing

Entertainment

Information Tech.

Communi-cations

Equipment

Aerospace Engines

Business Services

DistributionServices

Forest Products

Heavy Construction

Services

ConstructionMaterials

Prefabricated Enclosures

Heavy Machinery

Sporting & Recreation

Goods

Automotive

Production Technology

Motor Driven Products

Mining & Metal Manufacturing

Apparel

Leather & Related Products

Jewelry & Precious Metals

Textiles

Footwear

Processed Food

Tobacco

Medical Devices

Analytical InstrumentsEducation &

Knowledge Creation

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


Specialization of Regional EconomiesLeading Clusters by U.S. Economic Area, 2007

Boston, MA-NHAnalytical Instruments Education and Knowledge CreationMedical DevicesFinancial Services

Boston, MA-NHAnalytical Instruments Education and Knowledge CreationMedical DevicesFinancial Services

Los Angeles, CAEntertainmentApparelDistribution ServicesHospitality and Tourism

Los Angeles, CAEntertainmentApparelDistribution ServicesHospitality and Tourism

San Jose-San Francisco, CABusiness ServicesInformation TechnologyAgricultural ProductsCommunications EquipmentBiopharmaceuticals

San Jose-San Francisco, CABusiness ServicesInformation TechnologyAgricultural ProductsCommunications EquipmentBiopharmaceuticals

New York, NY-NJ-CT-PAFinancial ServicesBiopharmaceuticalsJewelry and Precious MetalsPublishing and Printing

New York, NY-NJ-CT-PAFinancial ServicesBiopharmaceuticalsJewelry and Precious MetalsPublishing and Printing

Seattle, WAAerospace Vehicles and DefenseInformation TechnologyEntertainmentFishing and Fishing Products

Seattle, WAAerospace Vehicles and DefenseInformation TechnologyEntertainmentFishing and Fishing Products

San Diego, CAMedical DevicesAnalytical InstrumentsHospitality and TourismEducation and Knowledge Creation

San Diego, CAMedical DevicesAnalytical InstrumentsHospitality and TourismEducation and Knowledge Creation

Chicago, IL-IN-WIMetal ManufacturingLighting and Electrical EquipmentProduction TechnologyPlastics

Chicago, IL-IN-WIMetal ManufacturingLighting and Electrical EquipmentProduction TechnologyPlastics

Pittsburgh, PAEducation and Knowledge CreationMetal ManufacturingChemical ProductsPower Generation and Transmission

Pittsburgh, PAEducation and Knowledge CreationMetal ManufacturingChemical ProductsPower Generation and Transmission

Denver, COBusiness ServicesMedical DevicesEntertainmentOil and Gas Products and Services

Denver, COBusiness ServicesMedical DevicesEntertainmentOil and Gas Products and Services

Raleigh-Durham, NCEducation and Knowledge CreationBiopharmaceuticalsCommunications EquipmentTextiles

Raleigh-Durham, NCEducation and Knowledge CreationBiopharmaceuticalsCommunications EquipmentTextiles

Atlanta, GATransportation and LogisticsTextilesMotor Driven ProductsConstruction Materials

Atlanta, GATransportation and LogisticsTextilesMotor Driven ProductsConstruction Materials

DallasAerospace Vehicles and DefenseOil and Gas Products and ServicesInformation TechnologyTransportation and Logistics

DallasAerospace Vehicles and DefenseOil and Gas Products and ServicesInformation TechnologyTransportation and Logistics

Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director.

Houston, TXOil and Gas Products and ServicesChemical ProductsHeavy Construction ServicesTransportation and Logistics

Houston, TXOil and Gas Products and ServicesChemical ProductsHeavy Construction ServicesTransportation and Logistics


Regions and Competitiveness

• Economic performance varies significantly across sub-national regions (e.g., provinces, states, metropolitan areas)

• Many essential levers of competitiveness reside at the regional level• Region’s specialize in different sets of clusters• Cluster strength directly impacts regional performance• Each region needs its own distinctive competitiveness agenda• Competitiveness requires effective policy collaboration between

regions and the national government

• Decentralization of economic policy is especially important in large countries to foster regional specialization, internal competition, and accountability


Economic Integration Among Neighboring CountriesTurkey’s Neighborhood

• Turkey sits at the crossroad between Europe and the Middle East• Economic coordination among neighboring countries can significantly enhance competitiveness• Integration offers greater opportunities than participation in broader economic forums (e.g., EU)


Competitiveness and the Neighborhood

• Opening trade and investment among neighbors

– A nation’s neighbors are its most natural trading and investment partners

– The natural path of internationalization for local firms is the neighborhood

– Open trade and investment make each a more attractive location for investment

• Economic coordination to drive improvements in the business environment– Capturing synergies in policy and infrastructure

– Gaining greater clout in international negotiations

• External agreements to help overcome domestic political and economic barriers to reform


• Eliminating trade and investment barriers within the region

• Simplifying and harmonizing cross-borderregulations and paperwork

• Coordinatinganti-monopoly and fair competition policies

• Harmonizing environmental standards

• Harmonizing product safetystandards

• Establishing reciprocal consumerprotection laws

• Opening governmentprocurementwithin the region

• Improving the efficiency of the regional transportationinfrastructure

• Creating an efficient energy network

• Enhancing regional communicationsand connectivity

• Linking financialmarkets

• Opening the movement of students for higher education

• Harmonizing administrativerequirements for businesses

• Facilitating cross-border cluster development

– e.g., Supplier networks

– Transport & Logistics

– Quality standards

Factor ConditionsFactor Factor

ConditionsConditionsContext for


Context for Context for Strategy Strategy

and Rivalryand Rivalry



Demand ConditionsDemand Demand

ConditionsConditions

Economic Integration Among NeighborsCapturing Synergies



• Coordinating macro-economicpolicies

• Coordinating programs to improve publicsafety


• A prioritized agenda to create a uniquecompetitive position for the country or region

• Implementing best practices in each policy area

• There are a huge number of policy areas that matter

• No country can or should make progress in all areas simultaneously

PolicyPolicyImprovementImprovement

EconomicEconomicStrategyStrategy

The Need for an Economic Strategy


National Value PropositionNational Value Proposition

The Need for an Economic Strategy

Refining Unique StrengthsRefining Unique Strengths Addressing Crucial ConstraintsAddressing Crucial Constraints

• What elements of the business environment and institutional context can be unique strengths relative to peers/neighbors?

• What existing and emerging clusterscan be developed?

• What are the crucial weaknesses and constraints that must be addressed to achieve parity with peer countries and allow the country to move to the next level?

• What are the distinctive competitive assets of the nation’s economy given its location, legacy, rate of progress, existing strengths, and potential strengths?

– What unique value as a business location?– In what types of fields / clusters?– What roles with neighbors, the broad region, and the wider world?

• Priorities and sequencing are a necessity in economic development


The Process of Economic DevelopmentShifting Roles and Responsibilities

Old ModelOld Model

• The central government drives economic development through policy decisions, spending and incentives

• The central government drives economic development through policy decisions, spending and incentives

New ModelNew Model

• Economic development is a collaborative process involving government at multiple levels, companies, educational and research institutions, and private sector organizations

• Economic development is a collaborative process involving government at multiple levels, companies, educational and research institutions, and private sector organizations

• Competitiveness must be a bottom-up process in which many individuals, companies, and institutions take responsibility and act


Role of the Private Sector in Economic Development

• The competitive advantage of companies depends partly on the quality of the business environment at the national and regional level

• A company gains advantages from being part of a strong cluster

Corporate role in competitiveness

• Inform government on business needs and constraints bearing on company and cluster development

• Nurture local suppliers and attract foreign suppliers

• Work closely with local educational and research institutions to improve their quality and create specialized programs addressing the cluster’s needs

• Collaborate with other companies to enhance competitiveness through trade associations and other mechanisms

• Participate actively in national and regional competitiveness initiatives

• Focus corporate social responsibility initiatives on enhancing the business environment


Private Sector Role in Economic DevelopmentTurkcell in Anatolia

• Turkcell was facing wage pressure and high turnover in its Istanbulcall center operations, where employees faced long commutes and had many alternative job opportunities

• Turkcell opened new call centers in Erzerum and Diyarbakir, which had become much more accessible by improved air travel and infrastructure

• Turkcell was able to attract a highly loyal staff from local universities at significantly lower wage costs

• Erzerum and Diyarbakir each gained jobs and momentum in improving competitiveness


Agenda






$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

-3% 0% 3% 6% 9%

Comparative Labor ProductivitySelected Countries

Growth of real GDP per employee (PPP-adjusted), 1990 to 2008

Real GDP per employee (PPP adjusted US$), 2008

Source: authors calculation Groningen Growth and Development Centre (2009), EIU (2009)

Turkey (Avg. growth 2001to 2008)Mexico

New Zealand

Australia

Iran

Slovakia

Pakistan

Brazil

Malaysia

Germany

Poland

Slovenia

Argentina

ChinaPhilippines

Russia

Indonesia

Bosnia

Korea

India

Thailand

Japan

Egypt

Belarus

Czech Republic

Georgia

Romania

Saudi Arabia

South Africa

Syria

Spain

Croatia

Chile

Oman

Cambodia

Kazakhstan

UAE

Ukraine

PortugalLithuania

Kuwait

Israel

Jordan

Greece

Hungary

Azerbaijan

Cyprus

Armenia

Albania

Macedonia

Austria

Malta

Estonia

Singapore

Bulgaria

Switzerland

Latvia

Vietnam

Serbia

Turkey


Decomposing Turkey’s GDP per Capita Growth

-$200

-$150

-$100

-$50

$0

$50

$100

$150

$200

$250

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Contribution to change in real GDP per Capita (PPP adjusted)

Labor Force Participation

Labor Productivity

Source: EIU (2008), GGDC total economy database (2008)


Turkey’s Competitiveness Profile, 2009

Macroeconomic Competitiveness (71)

Political Institutions (92)

Rule of Law (75)

Human Development (73)

MicroeconomicCompetitiveness (53)

Social Infra-structure and Pol. Institutions (78)

Macroeconomic Policy (68)

Business Environment Quality

(56)

Company Sophistication

(41)

Note: Rank versus 128 countries; overall, Turkey ranks 57th in 2008 PPP adjusted GDP per capita and 64th in Global CompetitivenessSource: World Economic Forum and nstitute for Strategy and Competitiveness, Harvard University (2009)


-20 -15 -10 -5 0 5 10 15 20

Corruption Perception Index, 2007

Note: Ranks only countries available in both years (91 countries total)Source: Global Corruption Report, 2008

Change in Rank, Global Corruption Report, 2007 versus 2001

Rank in Global

CorruptionIndex,2007

91

1 Finland

Canada

Bangladesh

Indonesia

Ireland

Portugal

Egypt

Iceland

Czech Republic

SlovakiaSouth Korea

Latvia

India

Slovenia

Thailand

Switzerland

France

Romania

Turkey

Estonia

Austria GermanyJapan

Vietnam

China

NorwayUK

MalaysiaLithuania

Colombia

HungaryTaiwan

Spain

Hong Kong

ChileUnited States

South Africa

Mexico

Croatia

Italy

Poland

Brazil

Argentina

Israel

Venezuela

Russia

Uruguay

New ZealandSweden

Tunisia

Peru

Tanzania

Uganda

Senegal

Philippines

Zimbabwe Cote d’Ivoire NigeriaPakistan

GreeceJordan

Ukraine

Panama

Worsening Improving

High corruption

Low corruption


Human DevelopmentTurkey vs. Peer Countries

Source: World Bank, Human Development Index 2009

GDP per capitaHuman

Development Index (HDI)

Life Expectency

Index

Education index

Gender Development Index (GDI)

Slovakia $ 20,076 45 42 59 46 40Hungary $ 18,755 46 43 73 28 37Lithuania $ 17,575 49 46 94 20 42Latvia $ 16,377 51 48 86 26 44Croatia $ 16,027 52 45 48 51 43Poland $ 15,987 53 41 51 33 39Gabon $ 15,167 54 103 154 103 85Russia $ 14,690 55 71 133 43 59Libya $ 14,364 57 55 67 61 54Mexico $ 14,104 58 53 48 78 48Chile $ 13,880 59 44 35 49 41Botswana $ 13,604 60 125 170 122 105Malaysia $ 13,518 61 66 61 99 58Argentina $ 13,238 62 49 56 37 46Turkey $ 12,955 63 79 95 111 70Romania $ 12,369 64 63 83 53 52Venezuela $ 12,156 65 58 69 47 55Montenegro $ 11,699 66 65 64 66 ..Panama $ 11,391 67 60 51 72 51Mauritius $ 11,296 68 81 91 106 67Bulgaria $ 11,222 69 61 75 44 50Uruguay $ 11,216 70 50 46 31 45Iran $ 10,955 71 88 104 119 76Kazakhstan $ 10,863 72 82 140 22 66Costa Rica $ 10,842 73 54 33 84 47Belarus $ 10,841 74 68 116 26 57Serbia $ 10,248 75 67 65 66 ..

Country GDP per capita (PPP US$), 2007

Rank, 2007


Turkey’s Macroeconomic Competitiveness - ContinuedAction Priorities

• Strengthen the independence of institutions like the Central Bank

• Stronger fiscal discipline– Create greater stability in government spending through fiscal rules

• Agree on a process of resolving the domestic political tensionsamong key institutions and interest groups

• Improve the quality of governmental organizations, including at the provincial level

• Continue efforts to improve the accessibility and quality of educationand health care services across the country


Turkish Company Sophistication

Assessment• Significant improvements, especially among large companies• Solid operational efficiency in manufacturing but weaker performance

in services• A huge gap between the large business groups, that compare

favorably to international peers, and the huge number of SMEs that are far behind

• The World Bank reports significant entry and exit of new companies, but little sustained growth of small companies in the Turkish economy

Action Agenda• Consolidate efforts to improve the performance of SMEs• Strengthen the linkages between large business groups and SMEs• Use cluster policy as a tool to boost SME development


WEAKNESSESSTRENGTHS

Turkey’s Business Environment Overall Strengths and Weaknesses

• Domestic transportation and communication infrastructure

• Rules and regulations for starting new companies

• Openness to foreign investment• Moderate level of tariff barriers• Domestic rivalry improving• Availability of local suppliers• IT policies• Improving sophistication of the financial

system

• Tax system• Access to credit, especially for SMEs• Limited workforce skills• Low sophistication of local buyers• Weak governance and auditing• Distortive effects of government-owned

companies on competition• Unreliable electricity supply• Innovation infrastructure• Burdensome customs procedures• Intellectual property protection• Low patenting rates• Limited management schools• Labor rigidity• Regulatory quality

Note: Rank versus 128 countries; overall, Turkey ranks 57th in 2008 PPP adjusted GDP per capita and 64th in Global CompetitivenessSource: Institute for Strategy and Competitiveness, Harvard University (2009)


0

20

40

60

80

100

120

140

Ease ofDoing

Business

EnforcingContracts

RegisteringProperty

Starting aBusiness

ProtectingInvestors

TradingAcrossBorders

GettingCredit

PayingTaxes

Closing aBusiness

Dealingwith

Licenses

EmployingWorkers

Ease of Doing BusinessTurkey, 2009

Ranking, 2009 (of 183 countries)

Source: World Bank Report, Doing Business (2009/10)

Favorable Unfavorable

Turkey’s per capita GDP rank: 57

73

27

36

56 57

6771

75

121

133

145


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

-1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0%

Cluster DevelopmentTurkey’s National Cluster Export Portfolio, 1997 to 2007

Change in Turkey’s world export market share, 1997 to 2007Source: 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.

Turk

ey’s

wor

ld e

xpor

t mar

ket s

hare

, 200

7

Change In Turkey’s Overall World Export Share: +0.18%

Turkey’s Average World Export Share: 0.87%

Exports of US$3.3 Billion =

Hospitality and Tourism

AutomotiveProcessed Foods

Business Services (-1.59%)

Transportation and Logistics

BiopharmaceuticalsProduction Technology


Oil and Gas

Marine Equipment

Information Technology Aerospace Vehicles and Defense

Plastics

Textiles

Construction Services (-5.2%)

Agriculture Products

Construction Materials

Financial Services

Lighting and Electrical Equipment

Heavy Machinery

Prefabricated Enclosures and Structures

EntertainmentJewelry, Precious Metals and Collectibles

Communications Equipment

Metal, Mining and Manufacturing

Apparel

FurnitureFootwear

Leather and Related Products

Building Fixtures and Equipment

Tobacco


FurnitureBuilding Fixtures,

Equipment & Services

Fishing & Fishing Products Hospitality

& TourismAgricultural

ProductsTransportation

& Logistics

Share of World Exports by ClusterTurkey, 2007

Plastics

Oil & Gas

Chemical Products

Biopharma-ceuticals

Power Generation

Aerospace Vehicles &

Defense

Lightning & ElectricalEquipment

Financial Services

Publishing & Printing

Information Tech.

Communi-cations

Equipment

Business Services

DistributionServices

Forest Products

Heavy Construction

Services

ConstructionMaterials

Prefabricated Enclosures

Apparel

Leather & Related Products

Jewelry & Precious Metals

Textiles

Footwear

Processed Food

Tobacco

Medical Devices

Analytical InstrumentsEducation &

Knowledge Creation

Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions.

Marine Equipment

Aerospace Engines

Heavy Machinery

Sporting & Recreation

Goods

Automotive

Production Technology


Mining & Metal Manufacturing

0.9% - 1.5%

1.5% - 3%

> 3%

Enter-tainment

World Market Share


Real Estate Development Firms

Real Estate Development Firms

Housing projects Hotels Office space

Road construction Dams Energy projects

Contractors, Subcontractors, Design

Services

Contractors, Subcontractors, Design

Services

Builders Architects Engineering firms

Institutions of Collaboration

TourismTourism Transport / Logistics

Transport / Logistics

Building Fixtures & Equipment

Building Fixtures & Equipment



Other: Furniture, Mining, Heavy

Machinery

Other: Furniture, Mining, Heavy

Machinery

9th

largest exporter in world

28th largest exporter in the world



Related Clusters

National / Local Government

National / Local Government

Domestic ForeignReal Estate

Investors

Real Estate Investors

HouseholdsHouseholds

TOKI Southeastern

Anatolia Project Administration

Primary & Secondary Housing

IndustryIndustry Energy Manufacturing

Equity Financing

Ministry of Public Works &

Settlement

Ministry of Public Works &

Settlement

Laws Setting Standards

Town Urban Planning Depts.

Town Urban Planning Depts.

Awarding of Licenses

Inspections

Regulatory Bodies

Banking Institutions

Banking Institutions

Mortgages Construction

Services Co Funding

Project Finance

Debt Financing

ProfessionalAssociations /

Chambers

ProfessionalAssociations /

Chambers

Contractors, construction employees

Engineers, city planners, architects

Related Cluster Assoc.

Related Cluster Assoc.

Real Estate Investment

Associations

Real Estate Investment

Associations

Univ. DegreesUniv. Degrees

Educational Institutions

BillKent (Private) Middle East

Technical Univ. (Public)

Istanbul Technical Univ. (Public)

Private Universities

One major association

Urban Planning firms Repair & Maintenance

professionals

200,000 companies with 100,000 in informal sector

15 large companies

Construction Services

Multiple associations for each related cluster

Multiple successful related clusters

Sources: HBS student team research (2007) –Yannis Katsarakis, AmrRezk, Emrah Sazak, Hayder Shaydurrllin, Bahadir Yadikar

The Turkish Construction Cluster


State of Turkish Cluster Development

Assessment• Turkey’s economy has naturally developed around clusters• Organized collaboration within these clusters remains low• Economic policy has not leveraged cluster development as a tool to

create synergies and deliver government policies more effectively– Recent EU-financed cluster programs have not yet had a significant

impact in Turkey

Action agenda• Pursue an aggressive national cluster development agenda to

support existing clusters and enable the emergence of new clusters in related fields

• Utilize clusters as a central tool for upgrading company sophistication, stimulating growth in SMEs, and driving regional competitiveness


Develop Related ClustersDevelop Related Clusters



Clusters and Economic Diversification

Deepen Existing ClustersDeepen Existing Clusters

Turn Products Into ClustersTurn Products Into Clusters • Local firms• MNCs


0.0%

0.5%

1.0%

1.5%

2.0%

0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8%

Change in Subcluster’s share of World Exports, 1997 – 2006

Subc

lust

er’s

shar

e of

Wor

ld e

xpor

ts, 2

006

Turkey’s Automotive Cluster, 1997 – 2007 Exports by Subcluster

Motor Vehicle AssemblySubcluster Overall Export Share: 1.37%

Overall change in Subcluster World Export Share : +1.21%

Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director.Exports of US$2.5 billion =

Glass

Automotive Components

Engines

Automotive PartsProduction Equipment


$0

$2,000

$4,000

$6,000

$8,000

$10,000

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

Regional Economic PerformanceTurkish Provinces

Unweighted Turkish Average: 0.81%

Note: 2001 is latest available data for Turkish provinces. Source: OECD Regions at a Glance: 2009

Unweighted Turkish Average: $4,888

Adana

IzmirMuğla

Yalova

Eskişehir

Kirklareli

Kirikkale

Nevşehir

Bursa

Ankara

Istanbul

Kocaeli($17,036)

Bolu (10.82%, $11,649)

Çanakkale Mersin Edirne

Artvin

Zonguldak (8.37%)

Antalya

Tekirdağ

GDP per Capita, 2001 (USD, PPP-adjusted)

Growth of Real GDP per Capita (PPP-adjusted), CAGR, 1995-2001

ManisaBilecik

Sakarya

Kayseri / KastamonuKütahya

Tunceli

Hatay

GiresunSivas

Düzce (-13.13%) BayburtOsmaniye

Sinop

Batman

Aydin / Karaman Balikesir Burdur RizeKilis

Ordu

BingölŞirnak Muş

Agri

YozgatAksaray

Adiyaman

Ezrincan

Uşak

Bitlis

NiğdeElaziğKahramanmaraş

Denizli

Van Hakkari

Afyon

Isparta

SamsonÇorum

DiyarbakirMaltya

KanyaKirşehir

GümüşhaneSiirtÇankiri

Ardahan

MardinEzurum

Kars Iğdir


Specialization by Cluster of Turkish Regions, 2007

Note: Source: European Cluster Observatory, 2009

IstanbulTextilesLeather and ApparelDistribution ServicesJewelry

IstanbulTextilesLeather and ApparelDistribution ServicesJewelry

Bati AnadoluFurnitureConstruction MaterialsDistribution ServicesAerospace

Bati AnadoluFurnitureConstruction MaterialsDistribution ServicesAerospace

AkdenzizTextilesHospitality and TourismApparelDistribution Services

AkdenzizTextilesHospitality and TourismApparelDistribution Services

Orta AnadoluFurnitureTextilesAgricultural ProductsMetal Mining and Manufacturing

Orta AnadoluFurnitureTextilesAgricultural ProductsMetal Mining and Manufacturing

Bati KaradenizTobaccoApparelMetal Mining and ManufacturingForest Products

Bati KaradenizTobaccoApparelMetal Mining and ManufacturingForest Products

Dogu KaradenizFood ProcessingDistribution ServicesFurnitureForest Products

Dogu KaradenizFood ProcessingDistribution ServicesFurnitureForest Products

Ortadogu AnadoluTextilesAgricultural ProductsApparelDistribution Services

Ortadogu AnadoluTextilesAgricultural ProductsApparelDistribution Services

Guneydogu AnadoluTextilesTobaccoOil and GasFood Processing

Guneydogu AnadoluTextilesTobaccoOil and GasFood Processing

Bati MarmaraApparelTextilesChemicalsConstruction Materials

Bati MarmaraApparelTextilesChemicalsConstruction Materials

Dogu MarmaraTextilesAutomotiveApparelFurniture

Dogu MarmaraTextilesAutomotiveApparelFurniture

EgeTobaccoTextilesConstruction MaterialsApparel

EgeTobaccoTextilesConstruction MaterialsApparel

Kuzeydogu AnadoluAgricultural ProductsFootwearDistribution ServicesHospitality and Tourism

Kuzeydogu AnadoluAgricultural ProductsFootwearDistribution ServicesHospitality and Tourism


Regional Economic Development in TurkeyAction Agenda

• Decentralize economic policy making to enhance regional leadership while creating incentives / accountability for performance

• Create a sound development platform in each region, including sound physical infrastructure and the provision of basic public services

• Create regional governmental capability to assume responsibility for regional economic development

• Decentralization of economic policy should be seen as a long term process, with devolution taking place in stages as regional government capabilities develop


Economic Integration Among Neighboring CountriesTurkey’s Neighborhood

• Turkey sits at the crossroad between Europe and the Middle East• Economic coordination among neighboring countries can significantly enhance competitiveness• Integration offers greater opportunities than participation in broader economic forums (e.g., EU)


Economic Coordination with Neighboring Countries

Assessment

• Turkey’s geographic position between a number of important global regions provides huge opportunities

• While government policy has focused on politically stable relations with neighbors, companies have started to extend their operations into these neighboring countries

Action Agenda

• Turkey should pursue economic coordination with neighboring countries as a critical tool of economic policy to reap the full benefits of its geographic location

• Turkey has a great opportunity to create a new Eastern neighborhood


Agenda






Toward a Turkish Economic Strategy

Implications

Maintain a sound macroeconomic policy platform

Achieve political stability

Continue to strengthen workforce skills

Consolidate efforts for SME development

Mobilize cluster development

• Large workforce with a strong work ethic at competitive wage levels

• Strong entrepreneurial “trading”legacy

• Significant and growing domestic market

• Large, spread out geographic area with heterogeneous regions

• Geographic position at the crossroads of major world regions

• Companies with experience to operate in challenging policy environments

• Stronger market institutions than other emerging economies

• Large workforce with a strong work ethic at competitive wage levels

• Strong entrepreneurial “trading”legacy

• Significant and growing domestic market

• Large, spread out geographic area with heterogeneous regions

• Geographic position at the crossroads of major world regions

• Companies with experience to operate in challenging policy environments

• Stronger market institutions than other emerging economies

Unique Strengths

Decentralize economic policy and strengthen regional institutions

Simplify trade of goods and services

Intensify economic collaboration with neighbors

Strengthen physical infrastructure connecting provinces and neighbors


Turkey: Moving to Action

• Strong private sector leadership is needed to address the well documented competitiveness challenges facing Turkey

• Encourage Provincial Competitiveness Councils working with the new economic development agencies to drive consensus on provincial plans which monitor implementation

– Involve representatives from the public, private and academic sectors as well as federal government participation

• Work towards the creation of a private-sector led National Council on Competitiveness to build consensus on an overall economic strategy and track implementation

– Public sector and academia participation is critical in order to develop effective national policy and coordinate implementation


Moving the Next Level of Turkish Competitiveness:The Role of the Private Sector

• The recent improvements in Turkish economic policy have created new opportunities for Turkish companies to grow and upgrade

• The next stage of economic development will require companies tobecome a more active partner in the design and implementation of economic policy

– Participate in national and regional competitiveness efforts– Collaborate with other companies in upgrading the business environment

• A coherent economic strategy for Turkey will be crucial to allow the country to be able to fundamentally enhance competitiveness

• Such a strategy will only be effective only if it is based on a new model of collaboration between business and government

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