Prof. Michael E. Porter presentation at the GCF2012, Entrepreneurship and Competitiveness: Implications for Saudi Arabia

1. Entrepreneurship and Competitiveness:
Implications for Saudi Arabia
Professor Michael E. Porter
Harvard Business School
Global Competitiveness Forum
Riyadh, Saudi Arabia
January 24, 2012
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 (World Economic Forum), “Clusters and the New
Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 2008), 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
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson 1 Copyright 2012 © Professor Michael E. Porter

2. The World Economy in Early 2012
• A weak macroeconomic environment is constraining growth in the
global economy (e.g., Europe, US, China)
– Failures of political leadership
• However, sustainable fiscal policies are necessary but not sufficient
to restore healthy growth
• The only way to ensure long term job and prosperity growth is through
fundamental improvement in competitiveness, especially for higher
income economies
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson 2 Copyright 2012 © Professor Michael E. Porter

3. What is Competitiveness?
• Competitiveness is manifested in the ability of companies operating in a country or region
to compete successfully in international markets while simultaneously improving the
living standards of citizens
• Competitiveness depends on the long term productivity with which a nation uses its
human, capital, and natural resources
– Competitiveness is not achieved through low wages or low currency
– Productivity sets sustainable wages and standard of living
– 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 benefits from a combination of domestic and
foreign firms
• Competitive businesses create rising incomes and good jobs
• Nations compete to offer the most productive environment for business
• Competitiveness is not a zero sum game
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson 3 Copyright 2012 © Professor Michael E. Porter

4. What Determines Competitiveness?
Microeconomic Competitiveness
Quality of the Sophistication
National State of Cluster of Company
Business Development Operations and
Environment Strategy
Macroeconomic Competitiveness
Social
Macroeconomic Development
Policies and Political
Institutions
Endowments
• Productivity ultimately depends on improving the microeconomic capability of the economy and the
sophistication of local competition
• Macroeconomic competitiveness sets the potential for high productivity, but is not sufficient
• Endowments create a foundation for prosperity, but true prosperity is created by productivity in the use
of endowments
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson 4 Copyright 2012 © Professor Michael E. Porter

5. Saudi Arabia’s Progress on Competitiveness
• Competitiveness has become central to Saudi Arabia’s economic policy agenda
• Substantial reforms have been implemented in areas like infrastructure,
market opening, legal reform, business regulation, education, and financial
markets
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson 5 Copyright 2012 © Professor Michael E. Porter

6. World Bank Doing Business Indicators
Saudi Arabian Doing Business Ranking, 2005 - 2012
13 10 12
15
23
38 38
118
2005 2006 2007 2008 2009 2010 2011 2012
Note: Rankings include total of 183 countries.
Source: World Bank, SAGIA
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson 6 Copyright 2012 © Professor Michael E. Porter

7. Saudi Arabia’s Progress on Competitiveness
• Competitiveness has become central to Saudi Arabia’s economic policy agenda
• Substantial reforms have been implemented in areas like infrastructure,
market opening, legal reform, business regulation, education, and financial
markets
• Saudi Arabia has established a base of home-grown private sector
businesses, together with state-controlled companies and multinationals that
are operating in the country
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson 7 Copyright 2012 © Professor Michael E. Porter

8. Saudi Arabia’s Progress on Competitiveness
• Competitiveness has become central to Saudi Arabia’s economic policy agenda
• Substantial reforms have been implemented in areas like infrastructure,
market opening, legal reform, business regulation, education, and financial
markets
• Saudi Arabia has established a base of home-grown private sector
businesses, together with state-controlled companies and multinationals that
are operating in the country
• However, boosting prosperity growth and job creation remain critical priorities
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson 8 Copyright 2012 © Professor Michael E. Porter

9. Prosperity Performance
Selected Middle Income Countries
PPP-adjusted GDP per
Capita, 2010 ($USD)
$30,000
UAE (-0.9%, 56,500) Average: 5.4% South Korea
$28,000 Cyprus
New Zealand
Slovenia
Greece
$26,000
Czech Republic
Portugal
$24,000 Bahrain
Oman
$22,000 Saudi Arabia Slovakia
$20,000 Poland
Hungary Estonia Average: $18,163
$18,000
Croatia
Lithuania
Panama
$16,000 Mexico Argentina
Chile Russia
Malaysia Latvia
$14,000 Trinidad & Tobago Uruguay Belarus
Lebanon
Turkey
Venezuela Bulgaria
$12,000 Romania Kazakhstan
Brazil Dominican Republic
Costa Rica South Africa
$10,000
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%
Source: EIU (2011), author’s calculations
Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2000 - 2010
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson 9 Copyright 2012 © Professor Michael E. Porter

10. Saudi Arabia’s Share of World Exports by Cluster, 2009
World Market Share
> 5.0%
1.27% - 5.0% Fishing & Enter- Textiles
Fishing tainment Prefabricated
Products Hospitality
0.2% - 1.26% Enclosures
& Tourism
Agricultural
Products
Transportation Furniture
Processed & Logistics Building
Food Aerospace Fixtures, Construction
Vehicles & Equipment & Materials
Distribution Information Defense Services
Jewelry &
Services Tech.
Precious Lightning & Heavy
Metals Electrical Construction
Business Analytical Services
Education & Instruments Equipment
Services Power Forest
Knowledge
Medical Products
Creation Generation
Devices Communi-
Publishing cations
& Printing Biopharma- Services
Financial Heavy
ceuticals Machinery
Services
Motor Driven Production
Chemical Products Technology
Products Tobacco
Oil & Automotive
Gas Aerospace Mining & Metal
Plastics Engines Manufacturing
Apparel
Leather &
Footwear Related Sporting Marine
Products & Recreation Equipment
Goods
Note: Saudi Arabia’s overall share of world exports is 1.268%.
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson 10 Copyright 2011 © Professor Michael E. Porter

11. Saudi Arabia’s Progress on Competitiveness
• Competitiveness has become central to Saudi Arabia’s economic policy agenda
• Substantial reforms have been implemented in areas like infrastructure,
market opening, legal reform, business regulation, education, and financial
markets
• Saudi Arabia has established a base of home-grown private sector
businesses, together with state-controlled companies and multinationals that
are operating in the country
• However, boosting prosperity growth and job creation remain critical priorities
• Stimulating entrepreneurship is central to reap the full benefits of these
competitiveness reforms
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson 11 Copyright 2012 © Professor Michael E. Porter

12. Competitiveness and Entrepreneurship
• Creates the necessary
context for entrepreneurship
to emerge and prosper
Competitiveness Entrepreneurship
• Drives competitiveness
upgrading
• Builds out clusters
• Enables economic
diversification
• Fundamental to large scale
job growth
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson 12 Copyright 2012 © Professor Michael E. Porter

13. What Drives Entrepreneurship?
Measures to Upgrade the Business Environment for Entrepreneurs
Context for
Firm Strategy
and Rivalry
• Availability of funding
− Access to lending
− Angel funding
− Organized risk capital
Factor
• Strong incentives Demand
(Input) − Low taxes on capital gains Conditions
Conditions − Strong IP protection
• Public recognition of
entrepreneurial success
• Entrepreneurship education • Government and private
• Mentorship programs sector procurement
• Entrepreneur networks policies open to SMEs
• Policies to ease new
business formation Related and
− Ease of incorporation Supporting
− Ease of doing business Industries
− Corporate and bankruptcy laws
• Availability of support
services such as legal and
business services
• A cluster-based
development model
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson 13 Copyright 2012 © Professor Michael E. Porter

14. Entrepreneurship in Saudi Arabia
The Opportunity
• Stable economy with a prudent financial structure
• Large, youthful and growing population
• Growing markets with many unserved niches
• No income taxes
• Emerging venture capital industry
• Large and sustained government investments in the economy
• Increasing foreign interest in investing in the Middle East
• Opportunity to serve the entire region from a base in the largest economy
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson 14 Copyright 2012 © Professor Michael E. Porter

15. Entrepreneurship in Saudi Arabia
Current Situation
• Competitiveness upgrading in the Saudi economy has enabled
entrepreneurship to take root
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson 15 Copyright 2012 © Professor Michael E. Porter

16. Entrepreneurship Profile in the GCC Region
Findings from the Saudi Fast Growth 100 and the Arabia 500
• Academic background often in engineering or business
• Worked 3-5 years for a global firm before launching their enterprise at 30,
often in a related industry
• Creatively configured products and services that are tailored to local
market conditions
• World class operating practices akin to those of multinationals
• Persistence and agility in order to compete with large incumbents
• International networks of business partners and associates
Source: Arabia 500
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson 16 Copyright 2012 © Professor Michael E. Porter

17. Entrepreneurship in Saudi Arabia
Current Situation
• Competitiveness upgrading in the Saudi economy has enabled
entrepreneurship to take root
• Entrepreneurs are making an important contribution to diversifying the
economy (services, non-resource industries)
• Entrepreneurs are creating a mechanism for Saudi Nationals to enter the
private sector
• However, further efforts to improve the context for entrepreneurs are critical
in order for entrepreneurship to reach its full impact on the Saudi economy
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson 17 Copyright 2012 © Professor Michael E. Porter

18. Current Efforts to Support Entrepreneurship in
Saudi Arabia
Financing Awareness Incubation
• Saudi Industrial • Saudi Fast Growth 100 • Riyadh Technology
Development Fund – • Prince Salman bin Incubation Center
Kafalah Program Abdulaziz - Young • Riyadh Techno Valley
• Centennial Fund Entrepreneur Awards • Dhahran Techno Valley
• Bab Rizq Jameel • Injaz-Saudi Program • National
• MIT Arab Business Plan Entrepreneurship
Competition Institute
• Many of these efforts are relatively new, and bringing them to scale will be critical for
entrepreneurship in Saudi Arabia
Source: “SME and Entrepreneurship Support Services in Saudi Arabia Stakeholder Mapping” report by SAGIA.
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson 18 Copyright 2012 © Professor Michael E. Porter

19. Challenges to Entrepreneurship in Saudi Arabia and
Other Emerging Economies
• Limited, but growing entrepreneurial culture
• Lack of public visibility and media coverage of emerging companies
• Risk aversion and fear of failure
• Limited skills in the Saudi workforce
• Still cumbersome government regulation and red tape
• Limited progress on cluster development, and few cluster collaboration
organizations supporting SMEs
• Lack of supplier development programs at large companies
• Risk of “crowding out” by government-linked companies and large MNCs
Source: Arabia 500
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson 19 Copyright 2012 © Professor Michael E. Porter

20. Entrepreneurship and Saudi Competitiveness
Conclusions
• Entrepreneurs are crucial in order to translate Saudi Arabian progress on
competitiveness into broad-based economic growth and employment
• Saudi entrepreneurs have begun to establish themselves as an integral
part of the Saudi economy
• The future success of Saudi entrepreneurs will depend on sustained
efforts to upgrade the Saudi business environment to meet
entrepreneurs’ specific needs
20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson 20 Copyright 2012 © Professor Michael E. Porter