#1New Zealand Competitiveness: The Next Agenda Professor Michael E. Porter Harvard Business School Catching the Knowledge Wave Auckland, New Zealand August 3th, 2001 This presentation draws on ideas from Professor Porter's articles and books, in particular, The Competitive Advantage of Nations (The Free Press, 1990), "The Microeconomic Foundations of Economic Development," in The Global Competitiveness Report 1998, (World Economic Forum, 1998), "Clusters and the New Competitive Agenda for Companies and Governments" in On Competition (Harvard Business School Press, 1998) and ongoing statistical study of clusters, Competing for Prosperity: The Microeconomic Foundations of Development, forthcoming, and "What is Strategy?" (Harvard Business Review, Nov/Dec 1996). 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.#2New Zealand's Macroeconomic Performance Real GDP Growth, year-by-year Real GDP growth rate in 7 % 6 5 4 Visit Visit 3 2 1 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 -1 -2 -3 Source: EIU CAON New Zealand Presentation 08-04-01 CK 2 Copyright 2001 Professor Michael E. Porter#3New Zealand 2001 • There is a strong sense in New Zealand today that the nation is not advancing • Some believe that the country is moving backwards CAON New Zealand Presentation 08-04-01 CK 3 Copyright 2001 Professor Michael E. Porter#43% New Zealand Productivity Growth (Index 1972 = 100) 2% Pre-reform Period 1973-1984 Post Macro- reform Period 1985-1991 1% 0% -1% -2% -3% Source: IMF (quoted from Diewert-Lawrance, 1999) CAON New Zealand Presentation 08-04-01 CK Post "Competitive Advantage of NZ" 1991 - 1998 Labor Productivity Capital Productivity Total Factor Productivity 4 Copyright 2001 Professor Michael E. Porter#5New Zealand Labor Productivity Growth, 1995 -2000 Change in Real GDP/ Hours worked 6% 5% 4% 3% 2% 1% 0% 1995 1996 1997 1998 1999 2000 (March) -1% Source: IMF CAON New Zealand Presentation 08-04-01 CK 5 Copyright 2001 Professor Michael E. Porter#6Real GDP growth rate 15% 10% 5% Comparative Real Growth Rates Selected Asian Countries 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998/1999 2000 -5% -10% -15% Source: EIU CAON New Zealand Presentation 08-04-01 CK Malaysia Taiwan Singapore Indonesia Hong Kong S Korea Thailand Australia NEW ZEALAND CO 6 Copyright 2001 Professor Michael E. Porter#7Active New Zealand Cluster Development Initiatives Waitakere North Shore • Marine • IT Northland • ⚫ Oysters • Tourism Manukau Distribution Tourism . • Auckland Health Software ● Wine Tourism Film Taranaki • Engineering Horticulture Wellington ● • Film and TV • Software • Creative Content . Seismic Engineering Natural Hazards Forestry Manawatu . Defence • Call Centre Food • IT . • Sports Horowhenua • Apparel Organics • Retirement . Invercargill • Apparel Classic Cars • Crops Source: Industry New Zealand CAON New Zealand Presentation 08-04-01 CK Dunedin • • Engineering Marine Multi-media Biotech Education Film 7 · Arts and Culture Rotorua • Wellness, Spa, Health Forestry Engineering Hawkes Bay • • • Forestry, wood processing and furniture Hi Tech Engineering Food Processing • Wine Retirement Nelson • . Arts/Crafts • Seafood Christchurch • Electronics Software Furniture Copyright 2001 Professor Michael E. Porter#8Share of total New New Zealand's Export Structure Manufacturing Export Specialization: 1994 to 1998 Zealand exports, 1998 New Zealand's average 80% 70% Primary products 60% 50% 40% 30% 20% Human capital intensive manufacturing 10% Natural-resource intensive manufacturing Labor intensive manufacturing 0% -15% -10% -5% Note: Size of bubble is US-$ volume of exports in 1998 Source: ITC 2001 CAON New Zealand Presentation 08-04-01 CK 8 0% 5% Technology intensive manufacturing 10% Export growth, 1994 - 1998 Copyright 2001 Professor Michael E. Porter#9Embracing Competition New Zealand's Relative Position Competitive Advantages Relative to GDP per Capita Country Ranking Competitive Disadvantages Relative to GDP per Capita Country Ranking Absence of Distortive 4 Extent of Locally Based Competitors 31 Government Subsidies Intensity of Local Competition 18 Hidden Trade Barrier Liberalization 5 Tariff Liberalization 7 Effectiveness of Antitrust Policy 10 Note: Rank by countries; overall NZ ranks 19 (17 on Business Environment) Source: Global Competitiveness Report 2000 CAON New Zealand Presentation 08-04-01 CK 9 Copyright 2001 Professor Michael E. Porter#10Strategic Issues Improvements in New Zealand's business environment have been more than matched by its international competitors • The country's dependency on natural-resource exports creates challenges • The economy is dominated by small and medium sized companies with limited global presence • Clusters are discussed and a significant number of cluster initiatives has been initiated but there have been limited commitment and results • New Zealand faces stiff competition from other Asian countries in manufacturing CAON New Zealand Presentation 08-04-01 CK 10 10 Copyright 2001 Professor Michael E. Porter#11Strategic Issues • Government policies are in some cases working at cross purposes Important elements of an action plan for New Zealand have been developed but there is no overarching strategy to integrate them - e.g. attract foreign direct investment - Improve human resources - - Science parks • A lack of clear vision for the country is mentioned by many New Zealanders CAON New Zealand Presentation 08-04-01 CK 11 Copyright 2001 Professor Michael E. Porter#12Rank 1 234 5 New Zealand's Relative Position GCR Ranking Over Time Current Competitiveness Index Company Strategy & Operations Index National Business Environment Index 6 7 8 9 10 11 12 13 14 15 16 17 New Zealand (1998) New Zealand (1998) New Zealand (2000) 18 19 New Zealand (2000) New Zealand (1998) 20 21 New Zealand (2000) 22 23 24 25 CAON New Zealand Presentation 08-04-01 CK 12 Copyright © 2001 Professor Michael E. Porter#13Comparative Labor Productivity Growth Manufacturing Sector, 1990 to 1999 Output per Hour, CAGR, 1990 to 1999 5% 4% 3% 2% 1% 0% Sweden Singapore United States Note: Source: *Germany (west): 1990 - 1998 US Bureau of Labor Statistics, EIU CAON New Zealand Presentation 08-04-01 CK France Japan Belgium Germany* Netherlands 13 Italy UK Canada NEW ZEALAND Norway Copyright 2001 Professor Michael E. Porter#14New Zealand Trade, 1988-1997 Percent of Total Country Exports By Natural Resource Intensity 100% 90% 80% 70% 60% Share of New Zealand 50% Exports (Percent) 40% 30% 20% 10% Non-Natural Resource Intensive Natural Resource Intensive 0% 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Source: UN Trade Statistics (Rev. 2), Institute for Strategy and Competitiveness, Harvard Business School. CAON New Zealand Presentation 08-04-01 CK 14 Copyright 2001 Professor Michael E. Porter#15Private companies' Share of R&D spending, 1999 80% 70% 60% 50% 40% 30% 20% 10% 0% Ireland Sweden Switzerland Source: OECD, 2001 CAON New Zealand Presentation 08-04-01 CK ՏՈ Private Sector R&D Spending OECD Countries Finland Germany 15 France Norway Canada Australia UK Netherlands Italy NEW ZEALAND Copyright 2001 Professor Michael E. Porter#16Conflicting Government Policies • New Zealand is pursuing policies that work in different directions EXAMPLES • Efforts to reduce compliance costs for business • Significant investments in education • Tightening of antitrust laws and enforcement • Efforts to improve risk capital availability • Plans to create R&D grants • Policies to encourage Maori business development • Policies that increase labor market rigidity Weakening of national education standards • Creation of a government- owned bank • Elimination of private pension system • Lack of competitive R&D tax credits • Inconsistent policies suggest the lack of consensus on an economic strategy for New Zealand CAON New Zealand Presentation 08-04-01 CK 16 Copyright 2001 Professor Michael E. Porter#17• Sources of Rising Prosperity A nation's standard of living (wealth) is determined by the productivity with which it uses its human, capital, and natural resources. The appropriate definition of competitiveness is productivity. - - - - - 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 how firms 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", rather it reveals a lack of fundamental competitiveness . 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 CAON New Zealand Presentation 08-04-01 CK 17 Copyright 2001 Professor Michael E. Porter#18CAON New Zealand Presentation 08-04-01 CK Innovation and Prosperity Prosperity Competitiveness (Productivity) Innovative Capacity For advanced economies innovation is critical to support high levels of prosperity 18 Copyright 2001 Professor Michael E. Porter#19Determinants of Productivity and Productivity Growth Macroeconomic, Political, and Legal Context for Development Microeconomic Foundations of Development Sophistication of Company Operations and Strategy Quality of the Microeconomic Business Environment • • Sound macroeconomic policies and a stable political / legal context are necessary to ensure a prosperous economy, but not sufficient Competitiveness ultimately depends on improving the microeconomic foundations of competition CAON New Zealand Presentation 08-04-01 CK 19 Copyright 2001 Professor Michael E. Porter#20Productivity and the Microeconomic Business Environment Context for Firm Strategy and Rivalry Factor (Input) Conditions • A local context that encourages efficiency, investment, and sustained upgrading Open and vigorous competition among locally based rivals Demand Conditions High quality, specialized inputs available to firms: - human resources - capital resources - physical infrastructure - administrative infrastructure - information infrastructure - scientific and technological infrastructure - natural resources CAON New Zealand Presentation 08-04-01 CK Related and Supporting Industries • Presence of capable, locally- based suppliers and firms in related fields . Presence of clusters instead of isolated industries Sophisticated and . demanding local customer(s) . · Unusual local demand in specialized segments that can be served globally Customer needs that anticipate those elsewhere Copyright 2001 Professor Michael E. Porter#21Grapestock Fertilizer, Pesticides, Herbicides Grape Harvesting Equipment The California Wine Cluster Winemaking Equipment State Government Agencies (e.g., Select Committee on Wine Production and Economy) Irrigation Technology Growers/Vineyards Wineries/Processing Facilities I California Agricultural Cluster Barrels Bottles Caps and Corks Labels Public Relations and Advertising Specialized Publications (e.g., Wine Spectator, Trade Journal) Educational, Research, & Trade Organizations (e.g. Wine Institute, UC Davis, Culinary Institutes) Tourism Cluster Sources: California Wine Institute, Internet search, California State Legislature. Based on research by MBA 1997 students R. Alexander, R. Arney, N. Black, E. Frost, and A. Shivananda. CAON New Zealand Presentation 08-04-01 CK 24 21 Food Cluster Copyright © 2001 Professor Michael E. Porter#22Global Competitiveness Report 2000 The Relationship Between Microeconomic Competitiveness and GDP Per Capita, 1999 Data 35,000 United States 30,000 Singapore Norway Iceland Switzerland Denmark Canada Belgium 25,000 Ireland Japan Australia Austria Hong Kong Netherlands ◆ Italy France Germany Finland United Kingdom Sweden 20,000 1999 GDP per Capita* 15,000 Taiwan Spain NEW ZEALAND ◆ Portugal Israel ◆Greece Korea Chile Czech Republic Mauritius Hungary Argentina Slovakia 10,000 Poland Venezuela Colombia Mexico Russia Costa Rica Ecuador Bulgaria Peru Thailand Brazil ◆ Malaysia ◆Turkey ◆ South Africa 5,000 Bolivia Ukraine Philippines El Salvador Vietnam China Egypt Indonesia ◆Jordan Zimbabwe India * Adjusted for Purchasing Power Parity Microeconomic Competitiveness Index Source: Porter, Michael E. "The Current Competitiveness Index: Measuring the Microeconomic Foundations of Prosperity." The Global Competitiveness Report 2000, New York: Oxford University Press, 2000 CAON New Zealand Presentation 08-04-01 CK 22 Copyright 2001 Professor Michael E. Porter#23Stages Of Competitive Development Factor- Investment- Innovation- Driven Economy Driven Economy Driven Economy Input Costs Source: Porter, Michael E., The Competitive Advantage of Nations, Macmillan Press, 1990 CAON New Zealand Presentation 08-04-01 CK Efficiency Higher Value 23 Copyright 2001 Professor Michael E. Porter#24Geographic Levels and Competitiveness CAON New Zealand Presentation 08-04-01 CK World Economy Broad Economic Areas Groups of Neighboring Nations Nations States, Counties, Departments Metropolitan Areas 24 24 Copyright 2001 Professor Michael E. Porter#25New Zealand's Economic Agenda in 2001 I. Address some chronic weaknesses II. Make the transition to an Innovation-Driven economy based on New Zealand's unique assets III. Better integrate economic and social policies IV. Articulate an overall national strategy CAON New Zealand Presentation 08-04-01 CK 25 Copyright 2001 Professor Michael E. Porter#26New Zealand's Economic Agenda in 2001 I. Address some chronic weaknesses Upgrade domestic financial markets CAON New Zealand Presentation 08-04-01 CK 26 Copyright 2001 Professor Michael E. Porter#27Factor (Input) Conditions Financial Markets New Zealand's Relative Position Competitive Advantages Relative to GDP per Capita Competitive Disadvantages Relative to GDP per Capita Country Ranking Country Ranking Financial Disclosure Requirements 9 Venture Capital Availability 28 Access to Local Equity Markets Ease of Access to Loans 28 25 Note: Rank by countries; overall NZ ranks 19 (17 on Business Environment) Source: Global Competitiveness Report 2000 CAON New Zealand Presentation 08-04-01 CK 27 27 Copyright 2001 Professor Michael E. Porter#28New Zealand's Economic Agenda in 2001 I. Address some chronic weaknesses - Upgrade domestic financial markets - Improve the human resource development system CAON New Zealand Presentation 08-04-01 CK 28 Copyright 2001 Professor Michael E. Porter#29Making the Transition To An Innovation-Driven Economy Factor-Driven Economy Investment-Driven Economy Innovation-Driven Economy • New Zealand's faces unusual challenges in moving to an Innovation- driven economy ⚫ It cannot follow the path of countries like Taiwan or Singapore who can pass through the Investment-Driven stage - - The level of wages exceeds that which can be supported through OEM manufacturing New Zealand's resource intensive industries have not equipped the nation to compete in advanced manufacturing and services CAON New Zealand Presentation 08-04-01 CK 29 29 Copyright 2001 Professor Michael E. Porter#30New Zealand's Economic Agenda in 2001 I. Address some chronic weaknesses - Upgrade domestic financial markets - Improve the human resource development system II. Making the transition to an Innovation-Driven economy - - Upgrade New Zealand's scientific and technological capacity in fields where it can be world class CAON New Zealand Presentation 08-04-01 CK 30 30 Copyright 2001 Professor Michael E. Porter#31Factor (Input) Conditions Science and Technology System New Zealand's Relative Position Competitive Advantages Relative to GDP per Capita Competitive Disadvantages Relative to GDP per Capita Country Ranking University / Industry Research Collaboration Country Ranking 42 Company Spending on R&D Patents per capita (1998) 31 21 Note: Rank by countries; overall NZ ranks 19 (17 on Business Environment) Source: Global Competitiveness Report 2000 CAON New Zealand Presentation 08-04-01 CK 31 Copyright 2001 Professor Michael E. Porter#32450 International Patenting Performance 400 USA 350 Annual U.S. 300 patents per 1 million population, 250 Taiwan О = 10,000 patents granted in 2000 2000 Japan Sweden 200 Germany 150 Israel 100 Canada South Korea Singapore UK NEW ZEALAND 50 Australia 0 0% 5% 10% 15% 20% 25% 30% 35% 40% Compound annual growth rate of US-registered patents, 1990 - 2000 Source: US Patent and Trademark Office (www.uspto.gov). Author's analysis. CAON New Zealand Presentation 08-04-01 CK 32 Copyright 2001 Professor Michael E. Porter#33Change in R&D Investments Compound Annual Growth Rate in R&D Expenditures, 1985-1998 R&D Spending as Share of GDP, 1998 4.5% Sweden 4.0% 3.5% 3.0% Japan South Korea USA 2.5% Germany Israel France 2.0% UK Australia Singapore 1.5% Ireland Canada NEW ZEALAND 1.0% Italy 0.5% 0.0% 0% 5% 10% 15% 20% 25% R&D Expenditures, CAGR, 1985 - 1998 Source: US Competitiveness 2001: Strengths, Vulnerabilities, and Innovation Priorities Report; Global Competitiveness Report 2000 CAON New Zealand Presentation 08-04-01 CK 33 Copyright © 2001 Professor Michael E. Porter#34Tax credit as share of R&D spending 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% Source: OECD estimates CAON New Zealand Presentation 08-04-01 CK Tax Treatment of R&D in OECD Countries Tax incentives for R&D Spending, Large Companies, 1999 NEW ZEALAND Germany Norway Sweden Switzerland Finland UK Japan Ireland US Korea France Netherlands Australia Canada Spain === 34 Copyright 2001 Professor Michael E. Porter#35Composition of New Zealand Patenting in the US Top Patenting Industries and Companies, 1999 Top 5 NZ-based companies by U.S. patents filed in 1999 FISHER + PAYKEL LIMITED (6 patents) TRIMBLE NAVIGATION, LTD. (6) AUCKLAND UNISERVICES LIMITED (5) - GENESIS RESEARCH & DEVELOPMENT CORPORATION, LTD. (5) INTERLOCK GROUP LIMITED (4) • U.S. patents field in 1999 by New Zealand inventors are almost exclusively by domestic companies Source: US Patent and Trademark Office (www.uspto.gov). Author's analysis. CAON New Zealand Presentation 08-04-01 CK 35 Copyright 2001 Professor Michael E. Porter#36Science and Technology System New Zealand's Action Agenda • Increase specialization of universities and research institutions around areas of existing and potential New Zealand excellence • Promote cooperation between universities and the private sector vial clusters • Raise the proportion of R&D spending by the non-government sector • Increase incentives for private sector R&D • Focus on attracting foreign investment in areas of potential R&D strengths CAON New Zealand Presentation 08-04-01 CK 36 Copyright 2001 Professor Michael E. Porter#37New Zealand's Economic Agenda in 2001 I. Address some chronic weaknesses - Upgrade domestic financial markets - Improve the human resource development system II. Making the transition to an Innovation-Driven economy - · Upgrade New Zealand's scientific and technological capacity in fields where it can be world class - Create advanced demand conditions 37 CAON New Zealand Presentation 08-04-01 CK 32 Copyright 2001 Professor Michael E. Porter#38Demand Conditions Demand Conditions New Zealand's Relative Position Competitive Advantages Competitive Disadvantages Relative to GDP per Capita Relative to GDP per Capita Country Ranking Openness of Public Sector 3 Buyer Sophistication Contracts Consumer Adoption of Latest Products 11 Note: Rank by countries; overall NZ ranks 19 (17 on Business Environment) Source: Global Competitiveness Report 2000 CAON New Zealand Presentation 08-04-01 CK Country Ranking 23 38 Copyright 2001 Professor Michael E. Porter#39Global Competitiveness Report 2000 Environmental Regulation and Microeconomic Competitiveness Environmental Regulatory Regime Index Current Competitiveness Index (CCI) New Zealand y=0.9807x 0.0346 R² = 0.891 Source: Global Competitiveness Report 2000 CAON New Zealand Presentation 08-04-01 CK 39 Copyright 2001 Professor Michael E. Porter#40• Environmental Regulation and Competitiveness Competing based on weak environmental standards perpetuates low incomes Corporate pollution is a sign of inefficient and unproductive use of resources Firm • Inefficient extraction of resources • Incomplete material utilization • Unnecessary waste products • Unnecessary energy use • Unproductive land use Customer • Usable materials in products that are discarded • • Products that use energy inefficiently ⚫Discarded or unnecessary packaging The need to control or treat pollution causes companies to perform activities that add cost but create no customer value - e.g., handling, storage, processing, disposal Pollution is a reflection of unsophisticated technology and weak management Strict environmental regulation stimulates the upgrading necessary to achieve advanced economic development CAON New Zealand Presentation 08-04-01 CK 40 Copyright 2001 Professor Michael E. Porter#41New Zealand's Economic Agenda in 2001 I. Address some chronic weaknesses - · Upgrade domestic financial markets. - Improve the human resource development system II. Making the transition to an Innovation-Driven economy - - Upgrade New Zealand's scientific and technological capacity in fields where it can be world class - Create advanced demand conditions - Move from networking to true cluster development Widen the base of meaningful clusters in the economy CAON New Zealand Presentation 08-04-01 CK 111 Copyright 2001 Professor Michael E. Porter 41#42Related and Supporting Industries Related and Supporting Industries New Zealand's Relative Position Competitive Advantages Relative to GDP per Capita Competitive Disadvantages Relative to GDP per Capita Country Ranking Country Ranking Cluster Presence 35 Extent of Locally Based Competitors 31 Domestic Supplier Quantity 29 Domestic Supplier Quality 20 Intensity of Local Competition 18 Note: Rank by countries; overall NZ ranks 19 (17 on Business Environment) Source: Global Competitiveness Report 2000 CAON New Zealand Presentation 08-04-01 CK 42 42 Copyright 2001 Professor Michael E. Porter#43Upstream Oil & Natural Gas Exploration & Development Houston Oil and Gas Cluster Oil & Natural Gas Completion & Production Oilfield Services/Engineering & Contracting Firms Downstream Oil Oil Trans- Trading Oil Refining Oil Distribution portation Oil Wholesale Marketing Oil Retail Marketing Gas Gathering Gas Processing Gas Trading Gas Transmis- sion Gas Distribution Marketing Gas Equipment Suppliers (e.g. Oil Field Chemicals, Drilling Rigs, Drill Tools) Specialized Technology Services (e.g. Drilling Consultants, Reservoir Services, Laboratory Analysis) Subcontractors (e.g. Surveying, Mud Logging, Maintenance Services) Business Services (e.g. MIS Services, Technology Licenses, Risk Management) Specialized Institutions (e.g. Academic Institutions, Training Centers, Industry Associations) CAON New Zealand Presentation 08-04-01 CK 43 Copyright © 2001 Professor Michael E. Porter#44• • • • Public / Private Cooperation in Cluster Upgrading Minnesota's Medical Device Cluster Factor (Input) Conditions Joint development of vocational- technical college curricula with the medical device industry Minnesota Project Outreach exposes businesses to resources available at university and state government agencies Active medical technology licensing through University of Minnesota State-formed Greater Minnesota Corp. to finance applied research, invest in new products, and assist in technology transfer CAON New Zealand Presentation 08-04-01 CK • • Context for Firm Strategy and Rivalry Aggressive trade associations (Medical Alley Association, High Tech Council) Effective global marketing of the cluster and of Minnesota as the "The Great State of Health" Full-time "Health Care Industry Specialist" in the department of Trade and Economic Development Related and Supporting Industries • Demand Conditions State sanctioned reimbursement policies to enable easier adoption and reimbursement for innovative products Copyright 2001 Professor Michael E. Porter#45Massachusetts Clusters Widening the Cluster Base Information Technology Metalworking Polymers CAON New Zealand Presentation 08-04-01 CK Tourism and Leisure Healthcare Financial Services Environmental Products and Services Knowledge Creation Specialty Paper Apparel Textiles and Footwear Marine 45 Copyright 2001 Professor Michael E. Porter#46Organizing for Competitiveness Commonwealth of Massachusetts Governor's Council on Economic Growth and Technology Functional Task Forces . International Trade Marketing Massachusetts Tax Policy and Capital Formation • Technology Policy and Defense Conversion • Issue Groups Cost of Doing Business Financing of Emerging Companies • Health Care • Restructuring Revitalizing Western Massachusetts Industry Cluster Working Groups Advanced Materials Biotechnology and Pharmaceuticals • Defense Marine Science and Technology Medical Devices Software • Telecommunications . Textiles CAON New Zealand Presentation 08-04-01 CK 40 46 Copyright 2001 Professor Michael E. Porter#47I. New Zealand's Economic Agenda in 2001 Address some chronic weaknesses - Upgrade domestic financial markets - Improve the human resource development system II. Making the transition to an Innovation-Driven economy Upgrade New Zealand's scientific and technological capacity in - - - fields where it can be world class Create advanced demand conditions Move from networking to true cluster development Widen the base of meaningful clusters in the economy - Pursue focused approach to attract FDI 47 47 CAON New Zealand Presentation 08-04-01 CK Copyright 2001 Professor Michael E. Porter#48I. New Zealand's Economic Agenda in 2001 Address some chronic weaknesses - Upgrade domestic financial markets - Improve the human resource development system II. Making the transition to an Innovation-Driven economy Upgrade New Zealand's scientific and technological capacity in - - - - fields where it can be world class Create advanced demand conditions Move from networking to true cluster development Widen the base of meaningful clusters in the economy Pursue focused approach to attract FDI Shift the role of government CAON New Zealand Presentation 08-04-01 CK 48 Copyright 2001 Professor Michael E. Porter#49Transition To An Innovation-Driven Economy Conflicting Government Policies EXAMPLES Consistent with an Innovation-driven Economy • Efforts to reduce compliance costs for business • Significant investments in education ● Tightening of antitrust laws and enforcement • Efforts to improve risk capital availability • Plans to create R&D grants • Policies to encourage Maori business development Inconsistent with an Innovation-driven Economy • Policies that increase labor market rigidity • Weakening of national education standards • Creation of a government- owned bank • Elimination of private pension system • Lack of competitive R&D tax credits CAON New Zealand Presentation 08-04-01 CK 49 Copyright © 2001 Professor Michael E. Porter#50Appropriate Roles of Government in Economic Development 1. 2. 3. 4. 5. Establish a stable and predictable macroeconomic, political, and legal environment Improve the availability, quality, and efficiency of general purpose inputs, infrastructure, and institutions Set overall rules and incentives governing competition that encourage productivity growth Facilitate cluster development and upgrading Create an explicit, ongoing process of economic change and competitive upgrading which informs citizens and mobilizes the private sector, government at all levels, educational and other institutions, and civil society. CAON New Zealand Presentation 08-04-01 CK 50 00 Copyright 2001 Professor Michael E. Porter#51I. New Zealand's Economic Agenda in 2001 Address some chronic weaknesses - Upgrade domestic financial markets - Improve the human resource development system II. Making the transition to an Innovation-Driven economy Upgrade New Zealand's scientific and technological capacity in - - - - - - fields where it can be world class Create advanced demand conditions Move from networking to true cluster development Widen the base of meaningful clusters in the economy Pursue focused approach to attract FDI Shift the role of government Develop competitiveness strategy at the regional level CAON New Zealand Presentation 08-04-01 CK 51 Copyright 2001 Professor Michael E. Porter#52Geographic Levels and Competitiveness CAON New Zealand Presentation 08-04-01 CK World Economy Broad Economic Areas Groups of Neighboring Nations Nations States, Counties, Departments Metropolitan Areas 52 42 Copyright 2001 Professor Michael E. Porter#53I. New Zealand's Economic Agenda in 2001 Address some chronic weaknesses - Upgrade domestic financial markets - Improve the human resource development system II. Making the transition to an Innovation-Driven economy Upgrade New Zealand's scientific and technological capacity in - - - - - - fields where it can be world class Create advanced demand conditions Move from networking to true cluster development Widen the base of meaningful clusters in the economy Pursue focused approach to attract FDI Shift the role of government · Develop competitiveness strategy at the regional level Transform company strategies CAON New Zealand Presentation 08-04-01 CK 53 53 Copyright 2001 Professor Michael E. Porter#54Company Operations and Strategy New Zealand's Relative Position Competitive Advantages Relative to GDP per Capita Senior Management Recruitment Competitive Disadvantages Relative to GDP per Capita Country Ranking Country Ranking 11 Company Spending on R&D 31 Licensing of Foreign Technology 26 Nature of Competitive Advantage 25 Value Chain Presence 24 Extent of Regional Sales 23 Control of International Distribution 23 Note: Rank by countries; overall NZ ranks 19 (22 on Company Operations and Strategy) Source: Global Competitiveness Report 2000 CAON New Zealand Presentation 08-04-01 CK 54 Copyright 2001 Professor Michael E. Porter#55CAON New Zealand Presentation 08-04-01 CK Determinants of Relative Performance Types of Competitive Advantage Differentiation (Non-Price Value) Competitive Advantage Lower Cost 59 55 Copyright 2001 Professor Michael E. Porter#56• Sources of Competitive Advantage Operational Effectiveness Strategic Positioning • Assimilating, attaining, and extending best practice Creating a unique and sustainable competitive position Do the same thing better CAON New Zealand Presentation 08-04-01 CK 506 56 Compete in a different way Copyright 2001 Professor Michael E. Porter#57New Zealand's Economic Agenda in 2001 I. Address some chronic weaknesses II. Make the transition to an Innovation-Driven economy based on New Zealand's unique assets III. Better integrate economic and social policies IV. Articulate an overall national strategy CAON New Zealand Presentation 08-04-01 CK 40 57 Copyright 2001 Professor Michael E. Porter#58Causes of Economic Inequality • • Inadequate education and skill development Monopolies and restraints to competition Discrimination • Faulty incentives for disadvantaged groups Command and control regulation · Managerial ignorance 58 CAON New Zealand Presentation 08-04-01 CK 80 Copyright 2001 Professor Michael E. Porter#59• • • Integrating Economic and Social Policy In the new thinking on competitiveness, there is no inherent conflict between economic and social policy Economic Policy Social Policy A productive and growing economy requires: Rising skill levels - Safe working conditions - Healthy workers who live in decent housing in safe neighborhoods - A sense of equal opportunity - Assimilation of underemployed citizens into the productive workforce - Low levels of pollution (pollution is a sign of unproductive use of physical resources) "Social" policies must be aligned with productivity in the economy and prepare and motivate citizens to succeed in the market system "Economic❞ policies must include explicit programs to raise human capability and improve the lives and the sense of opportunity for citizens CAON New Zealand Presentation 08-04-01 CK 59 Copyright 2001 Professor Michael E. Porter#60Training Integrating Economic and Social Policy Examples Organize training investments around clusters Housing • Create mechanisms to encourage home ownership; provide incentives for new company formation in the construction cluster; reduce unnecessary costs of housing construction due to regulatory and approval requirement; secure property rights to residents Health Care Create incentives for private health insurance; open health care delivery to competition Social Security Create incentives for saving; encourage a private pension system that agglomerates investment capital Environmental Quality Institute a regulatory regime that encourages movement to more environmental friendly methods; invest in technical assistance in eco-efficient processes and practices CAON New Zealand Presentation 08-04-01 CK 60 Copyright 2001 Professor Michael E. Porter#61New Zealand's Migration Balance Net Migration Flows to/from New Zealand, 1986 - 2001 Net Migration (Arrivals - Departures) 40,000 30,000 20,000 10,000 0 -10,000 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 -20,000 -30,000 Source: NZIER CAON New Zealand Presentation 08-04-01 CK 19 61 Copyright 2001 Professor Michael E. Porter#62New Zealand's Economic Agenda in 2001 I. Address some chronic weaknesses II. Make the transition to an Innovation-Driven economy based on New Zealand's unique assets III. Better integrate economic and social policies IV. Articulate an overall national strategy CAON New Zealand Presentation 08-04-01 CK 42 62 Copyright 2001 Professor Michael E. Porter#63New Zealand Strategy Elements • What New Zealand aspires to achieve in the world economy The New Zealand Scorecard is a good first step • What field New Zealand aims to be world class in • What New Zealand stands for the brand - - - E.g. Clean and healthy; in tourism, agriculture, manufacturing products and processes, ethical investment, ... Adventure; in tourism, in sports, World class technology • Where New Zealand needs to improve • How New Zealand will go about upgrading - A New Zealand Strategic Plan CAON New Zealand Presentation 08-04-01 CK 63 63 Copyright 2001 Professor Michael E. Porter