Cluster basics: Competitiveness - Coming to Grips With a Difficult Term

Competitiveness:
Coming to Grips With a Difficult Term
Prof. Christian H. M. Ketels
Institute for Strategy and Competitiveness
Harvard Business School
14th TCI Annual Conference
Auckland, New Zealand
1 December 2011

The Current Economic Context
Achieving
Spend
US, Europe, and Japan
Achieving
Provide Cheap Labor
Much of the Rest
Achieving
sustainable
prosperity
growth
Save
Improve
productivity
Sell Natural Resources
Achieving
sustainable
prosperity
growth

• What do we know about the drivers of productivity differences
across locations?
• How can locations devise an effective competitiveness strategy to
support high and rising levels of productivity and prosperity?
support high and rising levels of productivity and prosperity?
• What’s the role of clusters in competitiveness?

Explaining Differences in Productivity
Theory-Driven Approaches
KnowledgeKnowledge
CreationCreation
• Knowledge creation overcomes the challenges of
diminishing returns
• Invest in education and the knowledge-creating
sectors of the economy
InstitutionsInstitutions
• Institutional legacy largely explains current
outcomes
• Room for current policy choices?
FactorFactor
AccumulationAccumulation
CreationCreation sectors of the economy
• Empirically not proven to be sufficient
• Capital deepening as a key driver of prosperity
• Support savings and investment, attract capital
• Empirically not proven to be sufficient
• Provide a solid conceptual framework for understanding prosperity differences
• Little if any guidance to policy makers on how to improve prosperity

Explaining Differences in Productivity
Data-Driven Approaches
‘Benchmarking’
CompetitivenessCompetitiveness
IndicatorsIndicators
• Provide country-specific data and
rankings on specific dimensions of
competitiveness
Provide data
CompetitivenessCompetitiveness
IndexesIndexes
• Create synthetic aggregates of indicators
to rank overall competitiveness
Provide data
Empirical GrowthEmpirical Growth
LiteratureLiterature
• Many factors matter for prosperity outcomes; let the data
show which ones matter most
• Openness, sound money, and strong property rights matter
most ‘on average’
• Empirically not proven sufficient
• Generic blue-print of ‘ideal profile’, not how to get there
• Effective in increasing the willingness to change, not in identifying how
Analyze data
IndicatorsIndicators competitiveness

Explaining Differences in Economic Performance
Competitiveness
• The term competitiveness has been used widely and vaguely to capture
what explains cross-country differences in economic performance
CostCost
Balance Productivity
Market ShareMarket Share

Views about Competitiveness – Ability to Sell
• Competitiveness as wages
• Competitiveness as market share
• Locations can achieve short-run growth in ways that ultimately hurt
competitiveness
• Such approaches ultimately come at significant costs to their citizens and
undermine support for an open global economy

Views about Competitiveness – Balance
• Competitiveness as stable unit labor costs
• Competitiveness as a current account/trade surplus
• Competitiveness as sustainable public finances
• Locations that are competitive tend to display many of these characteristics,
but having these characteristics is no guarantee for prosperity
• Organizing policies around these goals is at best insufficient to achieve high
and growing standards of living

Views about Competitiveness: Productivity
• Competitiveness as the productivity
of the available labor force given the
quality of a location as a place to do
business
Prosperity
Labor
Productivity
Labor Force
Mobilization
• Labor productivity and labor force
mobilization are key drivers of
prosperity
• Productivity is a symptom of the
underlying competitiveness
fundamentals
Competitiveness Fundamentals
Productivity Mobilization

Macroeconomic Competitiveness
Microeconomic Competitiveness (MICRO)
Business
Environment
Quality
Sophistication
of Company
Operations and
Strategy
Social
Clusters
The Productivity-based View of Competitiveness
Dimensions of Competitiveness Fundamentals
Company
Sophistication
Macroeconomic
Policy (MP)
Social
Infrastructure
and Political
Institutions (SIPI)
Endowments
Size
Natural
Resources
Geographic
Location

Testing the Productivity-based View of Competitiveness
An Empirical Approach
• Data
– Broad set of data covering all dimensions of the framework
– Unit of observation is the average response per indicator, country, and year
– Data set is a panel across more than 130 countries and up to 8 years, using the
World Economic Forum’s Global Executive Survey and other sources
• Approach
– Step 1: Conduct separate, step-wise principal components analyses for MICRO, SIPI,
to derive their averages per country-year; simple average for MP
– Step 2: Comprehensive regression of MICRO, SIPI and MP on log GDP per capita
with endowment controls and year dummies.
Source: Delgado/Ketels/Porter/Stern, 2011
1 1 1
1 t
c,t MICRO c,t SIPI c,t MP c,t
END c,t t c,t
Ln Output per
Potential Worker MICRO SIPI MP
ENDOWMENTS year (1)
α β β β
α α ε
− − −
−
= + + + +
+ +

Findings: Competitiveness and Prosperity
• The linear model explains 83% of the variation of GDP per potential worker
across countries
• The model reveals that each broad competitiveness category matters, even
when controlling for the others and for endowments
– Microeconomic factors are
important, independent drivers
of prosperity Weights in
• Current conditions matter, even
when controlling for legacy effects
(institutional legacy, country fixed-
effects)
• Extends the findings of the theory-driven literature
• Integrates the now available data in a coherent conceptual framework
Weights in
overall model
SIPI 53%
MICRO 35%
Macro Policy 12%
100%
Source: Delgado/Ketels/Porter/Stern, 2011

• An integrated, empirically grounded framework to
understand competitiveness and its relation to sustainable
prosperity in general
• …but still little guidance on how to prioritize and sequence
policies for a specific location

Social Infrastructure
and Political Institutions
Macroeconomic
Policies
The Two Sides of Competitiveness
Macroeconomic
Competitiveness
Microeconomic
Competitiveness
Company
Sophistication
Clusters
Business
Environment
• Largely driven by central
government decisions
• “Good practice” standards apply
• Decisions taken by many
independent actors
• Action priorities highly context
• “Good practice” standards apply
universally
• Moderate level of interdependence
across policy areas
• Challenge is the political will to
implement a generic set of policies
• Action priorities highly context
dependent
• High level of interdependence
across policy areas
• Challenge is consensual choice
of an integrated set of actions
where limited resources have the
highest impact in a given context

Analytical Approach
1. Track performance on a wide range of indicators from fundamental
competitiveness to intermediate indicators to prosperity outcomes
2. Identify indicators as strengths or weaknesses relative to the
countries current stage of development
3. Diagnose competitiveness fundamental-root causes of intermediate
indicators and prosperity outcomes that stick out in such ways
4. Analyze complementarity across policy areas
5. Define an implementation strategy

Step 1: Dimensions of the Competitiveness Diagnostics
Prosperity Outcomes
Intermediate IndicatorsInnovation
FDI flows
Investment
ProductivityEquality
Labor utilization
Entrepreneurship
Quality of Life
Purchasing
Power
Environmental
conditions
Intermediate Indicators
Competitiveness
Global
Competitiveness
Report
Doing Business
Governance
Logistical Performance
Index
CorruptionKnowledge
Economy
Innovation
Exports/Imports
Imbalances
Trust
Specialization

Step 2: Identifying Strengths and Weaknesses
Latvia
High
Inequality
Prosperity Outcomes
High
Informality
Low
Manufacturing
Intermediate Indicators
Competitiveness

Step 3: Link Outcomes to Fundamental Competitiveness
19 Copyright 2011 © Christian KetelsSource: Hausmann/Rodrik, 2008

Step 4: Analyze Complementarity Across Policy Areas
e.g., Infrastructure
Investment
e.g., Workforce
Skills
e.g., Investment
Attraction
Specific Segment of
the Economy
Specific Segment of
the Economy
ific Segment of
he Economy
Specific Segment of
the Economy
Spec
th

Step 5: Define an Implementation Strategy
What to do How to get it done
• Institutional structure
• Capacity
• Consensus
• Leadership
• External environment

Clusters and Competitiveness
Clusters
Other Dimensions of
Competitiveness
ENHANCE
Static
(Leverage)
Dynamic
(Upgrade)
11 33
Competitiveness
ENABLE
• Co-location of companies
and other institutions
affecting the potential for
local value creation within a
given economic field through
spillovers and linkages
• Economic fundamentals
that set the productivity
level companies can reach
within a given geographic
location
22

Clusters Enhancing Competitiveness
The Impact on Regional Prosperity
Determinants of Regional Job Growth, Wages, and Patenting
• Specialization in strong clusters
• Breadth of position within each cluster
• Positions in related clusters
• Presence of a region‘s clusters in neighboring regions
Not significant
• Positions in “high-tech“ versus other clusters
Source: Porter/Stern/Delgado (2010), Porter (2003)

Clusters Enhancing Competitiveness
The Impact on Entrepreneurship
Survial Rates
of New Businesses (+)
The stronger the
cluster, the more
The stronger the
cluster , the higher
the survial rate of
new businesses
CLUSTERCLUSTER
New Industries (+) New Business Formation (+)New Business Formation (+)
Job GrowthJob Growth
In New Businesses (+)
The stronger the cluster, the more likely
new industries within the cluster are to
emerge
cluster, the more
dynamic is the
process of new
business formation
The stronger
the cluster, the
higher the job
growth in new
businesses
Source: Porter, The Economic Performance of Regions, Regional Studies, 2003; Delgado/Porter/Stern, Clusters and Entrepreneurship, Journal of Economic Geography, 2010;
Delgado/bPorter/Stern, Clusters, Convergence, and Economic Performance, mimeo., 2010.

Clusters Enhancing Competitiveness:
The Case for Action
• Agglomeration largely driven by business environment conditions and
‘automatic’ cluster effects in a market process
BUT
• Exploitation of localized spill-overs not automatic
• Exploration of opportunities for joint action not automatic
• Cluster efforts enable locations to benefit more from what they have

POLICYPOLICY
Competitiveness Enabling Clusters:
Sources of Cluster Emergence
Location Existing Clusters
Business Environment
Natural Resources
Context for competition across regions
Entrepreneurs

Competitiveness Enabling Clusters
Competitiveness and the State of Cluster Development
State of Cluster
Development
High
Competitiveness
Source: ISC analysis based on WEF Global Executive Opinion Survey, 2010
HighLow
Low
New Zealand

New Zealand Competitiveness Profile 2011
Macro (4)
Rule of Law
(2)
Context for Strategy and
Rivalry (2)
Micro (18)
Social Infra-
structure and Pol.
Institutions (4)
Macroeconomic
Policy (1)
Business
Environment Quality
(17)
Company
Sophistication
(19)
Source:UnpublisheddatafromtheGlobalCompetitivenessReport(2011),author’sanalysis.
Organizational Practices
(7)
Political Institutions
(5)
Human Development
(8)
Demand Conditions
(14)
Related and Supporting
Industries (34)
Factor Input Conditions
(10)
Administrat.
(2)
Skills
(8)
Innovation
(25)
ICT /Energy
(18)
Capital
(14)
Source:UnpublisheddatafromtheGlobalCompetitivenessReport(
Internationalization
(12)
Strategy
(23)
Logistical
(23)
Significant
advantage
Moderate
advantage
Neutral
Moderate
disadvantage
Significant
disadvantage

Clusters as Drivers of Competiveness Upgrading
Clusters as Tool
Better Actions More Impact
Better Actions More Impact
Cluster initiatives provide a
platform to discuss necessary
improvements in
competitiveness at the level
where firms compete
The organization of economic
development actions around
clusters leverages positive
spill-overs and mobilizes
private sector co-investment

What is Different about Cluster-Based Policy?
Cluster vs.
Narrow
Industries
Regional
Perspective
Public-Private
Collaboration
Build on
Regional
Strengths
Demand-
driven
Policy
Priorities
Competitiveness
Focus

Clusters as Drivers of Competiveness Upgrading:
The Challenge
100100
60
4545
1515
All employment All employment
in clusters
All employment
in strong clusters
Note: Income in light blue
Source: European Cluster Observatory, 2011
~25

Clusters as Drivers of Competiveness Upgrading:
Cracking the Glass Ceiling
From a few successful
cluster islands…
…to a more
competitive economy
• Systematic use of clusters as a
delivery channel for microeconomic
policies
• Active management of regional
• Active management of regional
cluster portfolios that engage many
clusters and harness cross-cluster
linkages
• Design of feed-back mechanisms
from cluster efforts to general
business environment upgrading
• Leverage cluster organizations to
enhance public private dialogue on
regional competitiveness

Clusters and Competitiveness Strategy
BusinessBusiness ClusterCluster
Positioning
• Identifies, communicates, and strengthens
the specific value proposition of the location
BusinessBusiness
EnvironmentEnvironment
ClusterCluster
PortfolioPortfolio
• Accelerates growth in
those fields where the
location has strengths
• Enables the emergence
of new clusters from
existing clusters
• Improves the
economic platform
for all clusters and
companies

Lessons for Cluster Practitioners
Public Officials
• Support clusters through competitiveness upgrading, not just money
for cluster organizations
• Integrate cluster efforts into a broader competitiveness strategy
• Work with an (ever evolving) regional portfolio of clusters, not
clusters in isolation
Cluster Initiative Managers
• Lobby for a more competitive business environment, not just
support for collaboration inside the cluster initiative
• Offer your insights and structures as an input for broader
competitiveness efforts
• Look for collaboration opportunities in your location’s overall cluster
portfolio

Cluster basics: Competitiveness - Coming to Grips With a Difficult Term

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