Transition Economies: Porter Model Comparisons

1. Transition Economies: Porter Model Comparisons Maj Ryan Craycraft

2. Introduction • Thesis • Porter Model Explanation • Case Studies • Russia • Poland • China • Conclusion

3. 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

4. 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

5. Porter’s Model • Like a business cycle, interactions among the previous activities help countries move along the macroeconomic country cycle

6. Porter’s Model (Nat’l Corporate Culture) (Consumers) (Supply Context) (Indirect Efficiencies) • Business Environment Diamond, aka “The Diamond”

7. Poland • Transition Plan: • Free Elections • Evolve to purely private economy • Create the Institutions of a capitalist economy • Rapidly to market economy • Liberalize economic functions (int’l trade / FDI) • Privatization • Construct Social Safety Net • Mobilize Int’l Monetary Aid

8. Poland’s Successes • Solid GDP Growth • Stable currency • Solid Manufacturing Sector • Exports • FDI • Small / Medium business growth

9. Poland’s Challenges • Poor Infrastructure • Political Instability • Small inflation (<5%) • Social Safety Net in jeopardy • Unemployment (esp. eastern Poland) • Debt of 50% GDP (2004)

10. 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

11. Poland in Porter’s Diamond (Nat’l Corporate Culture) (Consumers $14K PPP) (Supply Context) (Indirect Efficiencies) • Neutral Achievement • Balanced Income and Competitiveness

12. Russia: A Middle Income Country • Also a shock-therapy transition • #1 CIS country, but behind E. Europe countries • No EU Charter guidance

13. 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

14. 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

15. 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

16. Russia in Porter’s Diamond (Low Competitiveness) (Consumers $12K PPP) (Mixed Bag) (Supporting Infrastructure) • Overachieving Country • High Income compared to low competitiveness index

17. 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

18. China: Strengths • Macroeconomic indicators • High growth rates • Low inflation • High savings rate • Moderate public debt

19. China: Challenges • 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

20. 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

21. 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

22. 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

23. References • Porter, Michael E. “Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index” • 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. • Economist.com, Poland Country Briefing Factsheet, • 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 • Economist.com, China Country Briefing Factsheet, • Porter, Michael E., World Economic Forum, World Competitiveness Report 2006-2007