Achieving Economic and Social Progress in Latin America: The New Learning

1. Achieving Economic and Social Progress in Latin America: The New Learning Professor Michael E. PorterHarvard Business School VI Ministerial Forum for Development United Nations - New York July 11, 2013

2. The Dual Challenges of Development Social Development Economic Development • There is a powerfulconnection between economic and socialdevelopment • Improving competitiveness requires improving the economic and social context simultaneously

3. Economic Development depends on CompetitivenessWhat is Competitiveness? A country or state is competitive to the extent that firms operating there are able to compete successfullyin the regional and global economy while supportinghigh and rising wages and living standardsfor the average citizen • Competitiveness depends on the long-run productivity of a location as a place to do business • Productivity of existing firms and workers • Ability to achieve high participation of working age citizens in the workforce • Competitiveness is not: • Low wages • A weak currency • Jobs per se

4. What Determines Competitiveness? Endowments • Endowments, including natural resources, geographical location, population, and country size, create a foundationfor prosperity, but true prosperity arises from productivityin the use of endowments

5. What Determines Competitiveness? Macroeconomic Competitiveness Sound Monetary and Fiscal Policies Human Development and Effective Political Institutions Endowments • Macroeconomic competitiveness sets the economy-wide context for productivity to emerge, but is not sufficient to ensure productivity • Endowments, including natural resources, geographical location, population, and country size, create a foundationfor prosperity, but true prosperity arises from productivityin the use of endowments

6. What Determines Competitiveness? Human Development and Effective Political Institutions Macroeconomic Competitiveness Sound Monetary and Fiscal Policies Human Developmentand EffectivePolitical Institutions • Human Development: Basic education, health care, equal opportunity • Rule of Law: Property rights, personal security, and due process • Political Institutions: Stable and effective political and governmental organizations and processes Endowments

7. What Determines Competitiveness? Microeconomic Competitiveness Quality of the Business Environment State of Cluster Development Sophistication of Company Operations and Strategy Macroeconomic Competitiveness Sound Monetary and Fiscal Policies Human Development and Effective Political Institutions Endowments • Productivity ultimately depends on improving themicroeconomic capabilityof the economy and the sophistication of local competition revealed at the level of firms, clusters, and regions • Macroeconomic competitiveness sets the economy-wide context for productivity to emerge, but is not sufficient to ensure productivity • Endowments, including natural resources, geographical location, population, and country size, create a foundationfor prosperity, but true prosperity arises from productivityin the use of endowments

8. Peru’s National Business Environment, 2012 Context for Firm Strategy and Rivalry • Openness to foreign investment, trade, capital flows • Improvements in investor protections • Efforts to strengthen competition policy • Rigidity of employment • Difficulty in business formation • Low intensity of local competition • High Informality of the economy Factor (Input) Conditions Demand Conditions • Improving consumer protection regulation • Improving sophistication of local buyers • Weak environmental standards enforcement • Abundant resources: mineral, agricultural, fishing, and cultural • Advantageous location • Improving administrative infrastructure • Simplified customs procedures • Sound banking system, but high interest spreads • Improving financial markets, but limited venture capital availability • Poor physical infrastructure • Low skill levels in the labor force, mismatch with demand • Weak university-industry research collaboration • Few high-quality research and scientific institutions Related and Supporting Industries • Limited local suppliers and supporting industries • Shallow clusters

9. Geographic Influences on Competitiveness Nation Regions and Cities • Regions are the most important economic unit for competitiveness in larger countries, especially countries beyond subsistence development

10. Prosperity of Mexican States Campeche(-4.9%, $333,700) Mexico Real Growth Rate of GDP per Capita: 1.36% Distrito Federal Nuevo Leon Tabasco Coahuila Baja California Sur Quintana Roo Querétaro Gross Domestic Product per Capita , 2010(in constant 2003 Mexican Pesos) Tamaulipas Mexico GDP per Capita:$77,212 Aguascalientes Sonora Colima Chihuahua Jalisco Baja California Guanajuato Durango Yucatán Sinaloa San Luis Potosí Morelos México Nayarit Puebla Michoacán Veracruz Zacatecas Hidalgo Tlaxcala Guerrero Chiapas Oaxaca Real Growth Rate of GDP per capita, 2003-2010 Source: INEGI. Sistema de Cuentas Nacionales de México.

11. Many essential levers of competitiveness reside at the regional level Regions specializein different sets of clusters The Role of Regions in Economic Development

12. Traded Cluster Composition of the Puebla Economy Overall change in the Puebla Share of Mexican Traded Employment: +0.09% Construction Materials Textiles Apparel Automotive Building Fixtures, Equipment and Services Puebla’s national employment share, 2008 Processed Food Furniture Leather and Related Products Education and Knowledge Creation Forest Products Puebla Overall Share of Mexican Traded Employment: 4.20% Distribution Services Heavy Machinery Information Technology Employment 2003-2008 ChemicalProducts Added Jobs Lost Jobs Change in Puebla’s share of National Employment, 2003 to 2008 Employees 5,000 = Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Contributions by Prof. Niels Ketelhohn.

13. Many essential levers of competitiveness reside at the regional level Regions specialize in different sets of clusters Regions are a critical unit in competitiveness Each region needs its own distinctive strategy and action agenda Business environment improvement Cluster upgrading Improving government effectiveness The Role of Regions in Economic Development

14. Developing ClustersTourism in Cairns, Australia Public Relations & Market Research Services Travel Agents Tour Operators Local Retail, Health Care, andOther Services Local Transportation FoodSuppliers Hotels Attractions and Activities e.g., theme parks, casinos, sports Souvenirs, Duty Free PropertyServices Restaurants Airlines, Cruise Ships MaintenanceServices Banks, ForeignExchange Government Agencies e.g., Australian Tourism Commission, Great Barrier Reef Authority Educational Institutions e.g., James Cook University,Cairns College of TAFE Industry Groups e.g., Queensland Tourism Industry Council Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden

15. Domestic Production/Strengths Imports/Weaknesses Developing ClustersPeruvian Asparagus Inputs Related Clusters Fertilizer Financial Services • Institutions forcollaboration • Asparagus Industry Group (IPEH) • Peru Export Association (ADEX) • Agroexporters Guild (AGAP) • SME Promotion (PROMPEX) Seed/Seedlings Gastronomy Transportation/Logistics Pesticides Ports (Salaverry) Asparagus Growers Irrigation Systems White Asparagus Green Asparagus Cold Chain Transportation (Frío Aéreo) Machinery Processed/Frozen Asparagus Fresh Asparagus Railways Processing Equipment Airports Packing Material • GovernmentInstitutions • Export Promotion (PROMPERU) • Agriculture Sanitation (SENASA) • Universities(Trujillo, UNAM, UPN) • Technical Standards (ANTCS) Customs Agencies Other Equipment Source: Interviews with industry representatives, team analysis

16. Organize Public Policy around Clusters Business Attraction Education and Workforce Training Export Promotion Clusters Science and TechnologyInfrastructure (e.g., centers, university departments, technology transfer) Market Information and Disclosure Quality and environmental standards Specialized Physical Infrastructure Natural Resource Protection • Clusters provide a framework for organizing the implementationof many public policies and public investments directed at economic development

17. Economic progress has a positive impact on social progress, but rising GDP per Capita does not guarantee social progress We must measure social progress directly in order to understand performance and inform improvement The Social Progress Index is a new tool to do so Holistic framework Outcomes (not inputs) Separate from economic By separating social and economic progress, we can better understand performance and how social and economic performance are linked Economic Development and Social Progress

18. What is Social Progress? Social progress is the capacity of a society to meet the basic human needs of its citizens, establish the building blocks that allow citizens and communities to enhance and sustain the quality of their lives, and create the conditions for all individuals to reach their full potential. www.socialprogressimperative.org

19. The Social Progress Index Framework

20. Costa Rica

21. Comparing country Performance: Costa Rica vs. South Africa

22. The Role of Business in Social and Economic DevelopmentEvolving Approaches Philanthropy • Donations to worthy social causes • Volunteering

23. The Role of Business in Social and Economic DevelopmentEvolving Approaches Corporate Social Responsibility (CSR) Philanthropy • Compliance with community standards • Good corporate citizenship • “Sustainability” • Mitigate risk and harm • Donations to worthy social causes • Volunteering

24. The Role of Business in Social and Economic DevelopmentEvolving Approaches Philanthropy Corporate Social Responsibility (CSR) Creating Shared Value(CSV) • Donations to worthy social causes • Volunteering • Compliance with community standards • Good corporate citizenship • “Sustainability” • Mitigate risk and harm • Integrating social needs and challenges into economic value creation itself

25. What is Shared Value? Creating Shared Value: Addressing a social issue with a business model

26. Social Needs and Economic Value Creation EnvironmentalImprovement Energy Use Community Economic Development Water Use SupplierAccess andViability CompanyProductivity AffordableHousing WorkerSkills Health WorkerSafety • Socialdeficits create economiccosts • “Externalities” affect internalcompany productivity • Social needs represent the largest marketopportunities

27. Levels of Shared Value • Meeting social needs throughproductsandunderserved customers • Redefining productivity in the value chain • Improving the local and regional business environment

28. Creating Shared Value in Products and MarketsJain Irrigation Systems • Drip irrigation equipment for small farmers in Africa and India • Serves 4 million farmers worldwideas of 2012 • Reduces water use by over 40% • Enables higher crop yields that improve food security while raising farmers’ income • Jain is now a $820 million business that is rapidly growing

29. Shared Value in the Value ChainFibria, Brazil • Fibria, a large manufacturer of pulp for paper, utilizes planted eucalyptustrees rather than native and old growth forests • The company also encourages small-scale producers near its mills to plant eucalyptus in conjunction with other crops, assisting them with technical training and inputs • Fibria achieves far greater resource efficiency versus old growth forest production, with eucalyptus yielding 30 times higher yieldper acre of wood pulp • Small scale producers contribute 27% of the raw material volume utilized in Fibria mills, improving efficiency • 4000 households have significantly increased their income

30. Improving the Business Environment: Upgrading Channels Arca Continental • ArcaContinental is the second largest bottling company in Latin America, and one of the largest Coca-Cola bottlers in the world • Arca Continental established a program to train and invest in the micro-entrepreneur retailers who sell more than 60% of the Company’s products, including management, sales and marketing and merchandising • Invests in low energy use coolers and fixture improvements • Participating retailers register sales increases of 25% or more, with improved customer satisfaction, leading to similar increases in the sales of Arca’s products • Arca Continental recovers its investment in 6 months or less • Beginning in Mexico, the program is being extended to Argentina and Ecuador

31. Skill and Supplier DevelopmentRio Tinto, Canada Rio Tinto’s Diavik Diamond mine has helped create a variety of community based training partnerships with communities, contractors, governments and educational institutions in remote Northern Canada • Education: Promotes careers in diamond mining. Offers apprenticeships that employ and train students • Worker training: Partners with communities, colleges and government to train workers in mining related activities • Supplier development: Sources local inputs and capacity building for local providers of goods and services • Rio Tinto hires 62% of its employees locally • The company sources 71% of goods and services locally

32. Novartis ArogyaParivar InitiativeRural India Reconceiving Products and Markets Redefining Productivity in Value Chain Enabling Regional Development • Portfolio of the appropriate and affordable medicines from its originals, generics, and over-the-counter (OTC) businesses • Adapted packs of some OTC medicines (appeal and size) to address limited consumers’ ability to spend out-of-pocket on healthcare • Community health education program to address lack of health-seeking behavior • Frequent health camps with physicians brought into rural areas • Microfinance partners to improve healthcare infrastructure and access to working capital • Local sales teams that know the culture and speak the dialect, which provided access to crucial market intelligence and reduced mistrust • Dense network of local distributors to reduce stock-outs   

33. New Stakeholder Roles and Relationships • Shared value thinking is driving new relationshipsbetween companies, philanthropists, NGOs, and government in addressing social issues Traditional Roles New Roles • Initiate and scale shared value strategies • Donate to charitable causes Companies • Partner with companies and NGOs to catalyze shared value initiatives • Donate to charitable causes Philanthropists • Enable implementation of new shared value business models • Receive grants to provide social services NGOs • Tax business and regulate business practices; operate social programs Governments • Partner with companies and NGOs to make platform investments and support shared value strategies

34. Redefining the Role of Business • Businesses acting as businesses, not as charitable givers, are arguably the most powerful force for addressing many of the pressing issues facing our society • Shared value gives rise to far broader opportunities for economic success than conventional management thinking • Shared value thinking will drive the next wave of innovation, productivity, and economic growth • A transformation of business practice around shared value gives purposeto the corporation

35. The Dual Challenges of Development Social Development Economic Development • There is a powerfulconnection between economic and socialdevelopment • Improving competitiveness requires improving the economic and social context simultaneously