Transcript Transition Economies: Porter Model Comparisons

Transition Economies:
Porter Model Comparisons
Maj Ryan Craycraft
Introduction
• Thesis
• Porter Model Explanation
• Case Studies
– Russia
– Poland
– China
• Conclusion
Proposition
• If a country is to be successful in the
global market economy, its domestic
businesses must be competitive.
• IV: High levels of competitiveness
• DV: Successful Market Economy
Michael Porter’s Index
• Michael Porter, Harvard Business School has
developed a competitive index
– “The Current Competitiveness Index examines the
microeconomic bases of a nation’s GDP per capita.”
• Macroeconomic conditions are usually the object
of study, but although necessary, they are not
sufficient
• Microeconomic conditions are what actually
create wealth and “sustainable productivity”
• Comparative in nature
Porter’s Model
• Like a business cycle, interactions among
the previous activities help countries move
along the macroeconomic country cycle
Porter’s Model
(Nat’l Corporate Culture)
(Consumers)
(Supply Context)
(Indirect Efficiencies)
• Business Environment Diamond, aka “The Diamond”
Poland
• Transition Plan:
– Free Elections
– Evolve to purely private economy
– Create the Institutions of a capitalist economy
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Rapidly to market economy
Liberalize economic functions (int’l trade / FDI)
Privatization
Construct Social Safety Net
Mobilize Int’l Monetary Aid
Poland’s Successes
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Solid GDP Growth
Stable currency
Solid Manufacturing Sector
Exports
FDI
Small / Medium business growth
Poland’s Challenges
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Poor Infrastructure
Political Instability
Small inflation (<5%)
Social Safety Net in jeopardy
Unemployment (esp. eastern Poland)
Debt of 50% GDP (2004)
Poland in Porter’s Framework
• Moving from Factor Driven to Investment Driven
• Strong Manufacturing Sector, esp. automobiles
due to relatively cheap, educated labor force
•Strong FDI
Poland in Porter’s Diamond
(Nat’l Corporate Culture)
(Consumers
(Supply Context)
$14K PPP)
(Indirect Efficiencies)
•Neutral Achievement
•Balanced Income and Competitiveness
Russia: A Middle Income Country
• Also a shock-therapy transition
• #1 CIS country, but behind E. Europe
countries
– No EU Charter guidance
Russia: Strengths
• Macroeconomic Stability (oil revenue)
– 7th highest fiscal surplus in 2006
• Cold War capacities
– Higher education
– Research institutions spurring innovation
– Cultural factors that support innovation
• Flexible labor market
Russia: Challenges
• Public institutions
• Health factors
– Infant mortality
– Life expectancy
• Petrodollars preventing necessary painful
reforms
• Inflation near 10%
• Technological readiness of business sector
• Low intensity of domestic competition
Russia in Porter’s Framework
• Classified by WEF in the Efficiency-driven stage
• “Needs to focus on higher education and training,
market efficiency and technological readiness”
• While continuing public institution reform
Russia in Porter’s Diamond
(Low Competitiveness)
(Consumers
(Mixed Bag)
$12K PPP)
(Supporting Infrastructure)
•Overachieving Country
•High Income compared to low competitiveness index
China: Commanded Transition
• Slow transition method
• Excess production allowed to go the open
market
• When private enterprise failed, it was
cancelled
• Government-controlled financial system
China: Strengths
• Macroeconomic indicators
– High growth rates
– Low inflation
– High savings rate
– Moderate public debt
China: Challenges
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State-controlled banking sector
Low penetration of technology in industry
Poor secondary / tertiary education system
Public and Private institution quality
– Turning to capital punishment for corruption
– Burdensom government regulation
– Poor property rights
– Judiciary lacks independence
China in Porter’s Framework
• Moving from capture of cheap labor to need for efficiency to compete
because cheap labor in other places
•Same as Russia’s recommendations:
• “Needs to focus on higher education and training, market
efficiency and technological readiness”
• While continuing public institution reform
China in Porter’s Diamond
(Low Technology)
(Consumers
$7.5K PPP)
(Macro indicators
Public Institutions)
(Supporting Infrastructure)
•Underachieving Country
•Low Income compared to higher competitiveness index
Conclusion
• Transition from Factor-driven economy to
Investment-driven economy has coincided
with evolution from developing country to
middle-income, developed country
• New challenge will be to move from
Investment-driven to Innovation-driven in
order to sustain growth
References
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Porter, Michael E. “Enhancing the Microeconomic Foundations of Prosperity: The Current
Competitiveness Index”
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Hunter, Richard J. and Leo V. Ryan, “A Transitional Analysis of the Polish Economy: After Fifteen
Years, Still a ‘Work in Progress,” Global Economic Journal 5:2, 2005.
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Economist.com, Poland Country Briefing Factsheet,
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Marageta Drzeniek, “Russia’s Competitiveness at the Crossroads”, Paper presented at World
Economic Forum Russia CEO Roundtable, June 2007,
http://www.weforum.org/en/events/russia2007/index.htm
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Economist.com, China Country Briefing Factsheet,
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Porter, Michael E., World Economic Forum, World Competitiveness Report 2006-2007