Microeconomic Foundations of Competitiveness and International Business

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Microeconomic Foundations of Competitiveness and International Business

Christian H. M. Ketels, PhD Institute for Strategy and Competitiveness

Harvard Business School

Fribourg, Switzerland 8 December 2006

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 2005, (World Economic Forum, 2005), “Clusters and the New Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 1998), and the “Cluster Initiative Greenbook” by C Ketels, O Solvell, and G Lindqvist. 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 the author.

Additional information may be found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu

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Related Concepts

Achieving prosperity in competition

with other locations

Achieving profitability in competition

with other companies

Competitiveness International Business

• Locations compete based on business environment

conditions to support high levels of company productivity

• Companies compete based on internal capabilities and access to specific

locational environments

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Themes

• International businesses in the concept of competitiveness

• Strategy for locations and companies’ locational choices

• Investing in the competitiveness of locations

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Microeconomic Capacity Microeconomic Capacity

Quality of the Microeconomic

Business Environment Quality of the Quality of the Microeconomic Microeconomic

Business Business Environment Environment Sophistication

of Company Operations and

Strategy Sophistication Sophistication of Company of Company Operations and Operations and

Strategy Strategy

Microeconomics of Competitiveness: The Core Concept

Macroeconomic, Political, Legal, and Social Context Macroeconomic, Political, Legal, and Social Context

Macroeconomic, Political, Legal, and Social Context

• Competitiveness is given by the level of prosperity a location can sustain based on the productivity of companies based there

• Company productivity is driven by internal and external factors

• A sound macroeconomic, political, legal, and social context creates the potential for competitiveness, but is not sufficient

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Trends in the Global Economy

• Globalization of markets

• Globalization of value chains

• Globalization of knowledge

•

Innovation and skill

an increasing share of value added

•

Services an increasing share of value added

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Competition between locations can be positive-sum

Globalization and the Competition between Regions

Impact on Clusters

The Context for competition between locations is changing

• More locations reach a high level of growth, making them attractive

markets

to serve

• More locations meet the minimum conditions to become potential

production sites

• The environment locations provide become more important for company success as the their value creation logic is changing

And thus the relationship between locations

• More competiton

• More specialization and regional

concentration

• More linkages

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Positioning of Life Science Clusters

United States

NY

PA

NC VA WV

FL GA

SC

AL TN IL OH

IA

IN

AR

LA MS

TX ND

OK CA

AZ NV

WY MT

ID

NM CO OR

UT

KS SD

NE

MN

WI

MO WA

MI

KY

ME

MI VT NH

MA

CTRI

Note: All 318 Metropolitan Areas are shown as shaded; includes subclusters in which the MA has employment rank 1 or 2 nationally, 1999 data Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School

Boston, MA

Research Organizations 7%

Medical Equipment 12%

Boston, MA

Chicago, IL

Diagnostic Substances 42%

Chicago, IL

Diagnostic Substances 42%

Washington, D.C.

Los Angeles, CA

Health/Beauty Products 11%

Los Angeles, CA

Health/Beauty Products 11%

Middlesex – Somerset, NJ Health/Beauty Products 9%

Minneapolis, St. Paul, MN Surgical Instruments 6%

Newark, NJ

Pharmaceutical Products 12%

Newark, NJ

Oakland, CA

Biological Products 14%

Oakland, CA

Biological Products 14%

Philadelphia, PA

Research Production

Devices and Substances

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$15,000

$25,000

$35,000

$45,000

$55,000

50 100 150 200 250 300

Average Regional Wage, 2001

Share of Traded Employment in Strong Clusters (LQ > .8), Broad Cluster, 2001

y = 96.736x + 16218 R²= 0.377 New York, NY

Bay Area, CA

Boston, MA

Regional Specialization and Prosperity

Source: County Business Patterns; Michael E. Porter, The Economic Performance of Regions”, Regional Studies, Vol. 37, 2003

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Positioning of Footwear Clusters

Selected Countries

Vietnam/Indonesia

• OEM Production

• Focus on the low cost segment mainly for the European market

China

• OEM Production

• Focus on low cost segment mainly for the US market

Portugal

• Production

• Focus on short-

production runs in the medium price range

Romania

• Production subsidiaries of Italian companies

• Focus on lower to medium price range

United States

• Design and marketing

• Focus on specific market segments like sport and recreational shoes and boots

• Manufacturing only in selected lines such as hand-sewn casual shoes and boots

Source: Research by HBS student teams in 2002 – Van Thi Huynh, Evan Lee, Kevin Newman, Nils Ole Oermann

Italy

• Design, marketing, and production of premium shoes

• Export widely to the world market

Brazil

• Low to medium quality finished shoes, inputs, leather tanning

• Shift toward higher quality

products in response to Chinese price competition

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The Role of International Firms

• Driver of specialization

• Linkage between regional clusters

• Locations have to understand the motivations of international firms to attract their investment

• The successful internationalization of domestic firms becomes and increasingly important driver of locations’ economic success

• International firms increasingly become the managers of linkages between clusters, not just of their own operations in different locations

• Cluster organizations increasingly aim to also provide services in the

development and management of linkages between clusters

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Locations and Companies’ Locational Choices

The Role of Strategy

• Copy business environment conditions of prosperous locations

• Focus on established or high- wage clusters

• Identify most attractive

locations for specific activities in a given industry

• Develop specific business environment strengths to support a unique economic role

• Focus on a distinct and reinforcing set of clusters

• Identify most attractive

locations for specific activities that match the market

position of a given company

Location Locational Choices

Operational Efficiency

Strategic Positioning

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National Strategic Positioning: The Case of Ireland

• Ireland has been one of the most impressive economic growth stories of the last decades

• Ireland has been successful by positioning itself as a very efficient

location for multinational companies to serve the European market

• Ireland has supported this positioning through strengthening the relevant dimensions of the business environment

– Focus on education to provide a well-educated workforce at competitive wage levels

– Focus on communication and transportation infrastructure to provide an efficient platform to reach other European markets

– Focus on a highly professional investment attraction agency to smoothly manage all contacts with potential and established investors – Focus on activities and investors for which the selected positioning has

the strongest appeal

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Location and Strategic Positioning of Companies

Example of Interactions

FAST Search & Transfer

• Norwegian software company producing internet search technology

• Location has strong skill base but small demand and limited marketing capability

• Company has decided to position itself as a supplier to customer-

facing internet companies, not as a second Google

BMW

• German premium car producer that was looking for a new production site in Europe

• Strategic position based on German technology and up-to-date product portfolio

• Company has decided to place the plant in Leipzig (Germany), not in nearby Central European locations as many competitors

Location driving strategy Strategy driving location

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Related But Different Concepts

• Aims to improve the quality of locations

• Takes the quality of locations as given

• Aims to improve

companies’ ability to leverage barriers between differences across locations

Competitiveness International Business

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Company-Driven Competitiveness and Cluster Efforts

Danfoss,

Southern Jutland (Denmark)

Ensure availability of skills as company reduces manufacturing

operations

Dow Chemical/BMW/…, Mitteldeutschland (Germany)

Ensure attractiveness for further investments by headquarters

Magna Steyr, Styria (Austria)

Ensure capabilities at regional supplier network

Philips,

Eindhoven (Netherlands)

Increase innovative capacity in an open innovation-model

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• Social and economic goals can be addressed simultaneously by

improving a company’s competitive context

• Social and economic goals can be addressed simultaneously by

improving a company’s competitive context

Strategic Corporate Philanthropy

• Companies should give not just money but

leverage the company’s unique capabilities in support of social causes, far exceeding the impact possible by individuals

• Companies should give not just money but

leverage the company’s unique capabilities in support of social causes, far exceeding the impact possible by individuals Where to Focus

Where to Focus Corporate Philanthropy Corporate Philanthropy

How Companies Should Invest in Philanthropy

Source: Porter/Kramer (2006)

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Picking a location:

Where do we locate which activity in sync with our strategic position?

Picking a location:

Where do we locate which activity in sync with our strategic position?

Improving a location:

How can improve the value of our location in supporting our strategic position?

Improving a location:

How can improve the value of our location in supporting our strategic position?

Leveraging a location:

How do we derive strategic benefits from the characteristics of our location?

Leveraging a location:

How do we derive strategic benefits from the characteristics of our location?

Location

Location StrategyStrategy

Location and Strategic Management

Traditional roles of locational analysis

New roles of locational analysis