Competitiveness and the State of Entrepreneurship p in Saudi Arabia Professor Michael E. Porter Harvard Business School January 27, 2009 This presentation draws on ideas from Professor Porter s articles and books, in particular, The Competitive Advantage of Nations (The Free Press, 1990), Towards a New Global Competitiveness Index, in The Global Competitiveness Report 2008 (World Economic Forum, 2008), with S. Stern, M. Delgado, C. Ketels, Clusters and the New Competitive Agenda for Companies and Governments in On Competition (Harvard Business School Press, 1998), and ongoing research on clusters and competitiveness. 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. Further information on Professor Porter s work and the Institute for Strategy and Competitiveness is available at www.isc.hbs.edu Version: January 24, 2009, 3pm 1 Copyright 2009 Professor Michael E. Porter
State of Saudi Arabian Competitiveness Assessing the competitive position of Saudi Arabia in 2009 Progress over the last year Defining the strategic agenda Igniting entrepreneurship and SME development 2 Copyright 2009 Professor Michael E. Porter
Competitiveness and the Global Crisis Governments all over the world are focused on short-term crisis management Short-term term actions will be most effective if they are tied to long-term competitiveness improvements The crisis offers an opportunity for making changes that are difficult during normal times 3 Copyright 2009 Professor Michael E. Porter
PPP-adjusted GDP per Capita, 2007 $50,000 Prosperity Performance Selected Countries Norway Qatar ($73,079) $40,000 $30,000 $20,000 $10,000 $0 USA Ireland Kuwait Hong Kong Canada Singapore Switzerland Iceland Netherlands Australia Austria Sweden Finlan Germany UK Taiwan Japan France d Bahrain Italy Spain Greece UAE Slovenia New Zealand Israel Saudi Arabia Czech Republic South Korea Oman Portugal Hungary Slovakia Argentina Brazil Lebanon Colombia Syria Yemen Chile Mexico South Africa Turkey Jordan Philippines Nigeria Poland Croatia Malaysia Costa Rica Romania Tunisia Thailand Egypt Indonesia Sri Lanka Pakistan India Vietnam Bangladesh Lithuani a Russi a Estonia Cambodia 0.0% 1.5% 3.0% 4.5% 6.0% 7.5% 9.0% Source: EIU (2008), authors calculations Growth of Real GDP per Capita (PPP-adjusted), CAGR, 1998-2007 Latvia China 4 Copyright 2009 Professor Michael E. Porter
What is Competitiveness? Competitiveness depends on the productivity with which a nation uses its human, capital, and natural resources. Productivity it sets the standard d of living i (wages, returns on capital, returns on natural resources) that a country can sustain It is not what industries a nation competes in that matters for prosperity, but how productively it competes in those industries Productivity in a national economy depends on a combination of domestic and foreign firms The productivity it of local l or domestic industries i is fundamental to competitiveness, not just that of export industries Nations compete to offer the most productive environment for business The public and private sectors play different but interrelated roles in creating a productive economy 5 Copyright 2009 Professor Michael E. Porter
Comparative Labor Productivity Selected Countries GDP per employee (PPP adjusted US$), 2007 100,000 Qatar ($122,262) CAGR 2002-2007 Norway Average rate 2001-2006 90,000 USA Ireland 80,000 France Austria Hong Kong UK Finland 70,000 Canada Kuwait Sweden Italy Australia Germany Singapore Switzerland Spain Japan 60,000 Saudi Arabia Saudi Arabia Bahrain Oman Slovenia 50,000 New Zealand South Korea UAE Slovakia Hungary Czech 40,000 Republic Estonia Poland Lithuania Latvia 30,000 Chile Malaysia Argentina Mexico Russia Turkey Iran 20,000 South Africa Brazil Egypt Iraq (-6.3%) Jordan Thailand 10,000 Syria Sri Lanka Philippines Indonesia China Yemen Pakistan India Vietnam Cambodia 0-2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% Compound annual growth rate (CAGR) of real GDP per employee (PPP-adjusted), 2002-2007 Note: In some cases 2006 data used where 2007 data unavailable. Source: authors calculation, EIU (2009), Groningen Growth and Development Centre (2009) 6 Copyright 2009 Professor Michael E. Porter
Employees as % of Total Population, 2007 0.8 Labor Force Mobilization Selected Countries 0.7 0.6 0.5 OECD average: 0.48 0.4 03 0.3 0.2 01 0.1 0 KUWAIT QATAR BAHRAIN BRAZIL UNITED STATES SOUTH KOREA Note: Use most recent year available, either 2007 or 2006 RUSSIA ISRAEL IRAN SYRIA INDIA TURKEY IRAQ Source: The Conference Board and Groningen Growth and Development Centre, Total Economy Database, April 2008 JORDAN OMAN EGYPT SAUDI ARABIA YEMEN 7 Copyright 2009 Professor Michael E. Porter
Gross Fixed Investment as % of GDP (2007) 36% 34% Vietnam Fixed Investment Rates Selected Countries China (40.4%) Qatar (44.8%) India Latvia 32% 30% Croatia Spain South Korea Slovenia Sri Lanka 28% Iran Australia Slovakia Jordan Thailand 26% Singapore Yemen Indonesia Czech Ireland 24% Republic Tunisia Japa n New Zealand Denmark Malaysia 22% Canada Lebanon Syria Kuwait Egypt Pakistan UAE France Russia Chile Turkey Hong Kong 20% Norway Finland Oman Saudi Arabia Sweden Israel 18% Germany UK Brazil Bahrain Iceland Colombia Argentina 16% USA 14% Philippinesi -5% -3% 0% 3% 5% 8% 10% 13% 15% Change in Gross Fixed Investment (as % of GDP), 2003-2007 Source: EIU, 2007. 8 Copyright 2009 Professor Michael E. Porter
FDI Flow (millions USD) 25,000 Foreign Direct Investment Flows Saudi Arabia Inward FDI Outward FDI 20,000 15,000 10,000 5,000 0 1980-1999 Average 1990-1999 Average 2000-2004 Average 2005 2006 2007 Source: World Investment Report, 2008 9 Copyright 2009 Professor Michael E. Porter
World Export Share (current USD) Saudi Arabia s Export Share Trends By Type of Product, 1991-2006 12.0% Processed Goods Semi-processed Goods Unprocessed Goods 10.0% Services TOTAL (including unprocessed goods) 80% 8.0% 6.0% 4.0% 2.0% 0.0% 1991 1993 1995 1998 2000 2002 2004 2006 Source: UNComTrade, WTO (2008) 10 Copyright 2009 Professor Michael E. Porter
Average U.S. patents per 1 million population, p 2003-2007 45 40 Innovative Capacity Innovation Output, Selected Countries Ireland Hong Kong 35 30 25 20 15 10 South Africa Turkey Spain Brazil 5 Mexico Kuwait Malaysia Argentina Russia India Egypt China Thailand Saudi Arabia Poland Chile 0-20% -10% 0% 10% 20% 30% Source: USPTO (2008), EIU (2008) CAGR of US-registered patents, 2003 2007 525 patents = 11 Copyright 2009 Professor Michael E. Porter
Determinants of Competitiveness Microeconomic Competitiveness Quality of the National Business Environment State of Cluster Development Sophistication of Company Operations and Strategy Macroeconomic Competitiveness Social Infrastructure and Political Institutions Macroeconomic Policies Endowments Macroeconomic competitiveness creates the potential for high productivity, but is not sufficient Productivity ultimately depends on improving the microeconomic capability of the economy and the sophistication of local competition 12 Copyright 2009 Professor Michael E. Porter
Macroeconomic Competitiveness Social Infrastructure and Political Institutions Macroeconomic Policies Basic human capacity Fiscal policy Basic education Government surplus/deficit Health system Government debt Political institutions Political freedom Voice and accountability Political stability Government effectiveness Centralization of economic policymaking Monetary policy Inflation Interest rate spread Rule of law Judicial independence Efficiency of legal framework Business costs of corruption Civil rights 13 Copyright 2009 Professor Michael E. Porter
Microeconomic Competitiveness: Quality of the Business Environment Factor (Input) Conditions Access to high quality business inputs Natural endowments Human resources Capital availability Physical infrastructure Administrative infrastructure (e.g. registration, permitting) Scientific and technological infrastructure Information and transparency infrastructure Context for Firm Strategy and Rivalry Local rules and incentives that encourage investment and productivity e.g. performance based salaries, incentives for capital investments, intellectual property protection Vigorous local competition Openness to foreign and local competition Related and Supporting Industries Availability of suppliers and supporting industries Demand Conditions Sophistication of local customers and needs Strict quality, safety, and environmental standards Many things matter for competitiveness Successful economic development is a process of successive upgrading, in which the business environment improves to enable increasingly sophisticated ways of competing 14 Copyright 2009 Professor Michael E. Porter
Microeconomic Competitiveness: Cluster Development Huston Oil and Gas Cluster Upstream Downstream Oil & Natural Gas Exploration & Development Oil & Natural Gas Completion & Production Oil Transportation Gas Gathering Oil Trading Gas Processing Oil Refining Gas Trading Oil Distribution Gas Transmission Oil Wholesale Marketing Gas Distribution Oil Retail Marketing Gas Marketing Oilfield Services/Engineering & Contracting Firms Equipment Suppliers Specialized Technology Services Subcontractors Business Services (e.g. Oil Field Chemicals, Drilling Rigs, Drill Tools) (e.g. Drilling Consultants, Reservoir Services, Laboratory Analysis) (e.g. Surveying, Mud Logging, Maintenance Services) (e.g. MIS Services, Technology Licenses, Risk Management) Specialized Institutions (e.g. Academic Institutions, Training Centers, Industry Associations) 15 Copyright 2009 Professor Michael E. Porter
Saudi Arabia s Competitiveness Progress on the Competitiveness Index 2007 2008 Estimated Ranking: New Global Competitiveness Index 41 36 Macroeconomic Competitiveness 32 35 Microeconomic Competitiveness 53 36 GDP Per Capita Rank (ppp-adjusted) 36 36 Note: Rank versus 131 countries; overall, Saudi Arabia ranks 36 th in 2008 PPP adjusted GDP per capita and 36 h in Business Competitiveness. Source: Institute for Strategy and Competitiveness, Harvard University (2009) 16 Copyright 2009 Professor Michael E. Porter
Saudi Arabia s Position Macroeconomic Competitiveness 2007 2008 Estimated Macroeconomic Competitiveness Index 32 35 Social Infrastructure and Political Institutions 48 41 Macroeconomic Policy 20 27 Note: Rank versus 131 countries; overall, Saudi Arabia ranks 36 th in 2008 PPP adjusted GDP per capita and 36 h in Business Competitiveness. Source: Institute for Strategy and Competitiveness, Harvard University (2009) 17 Copyright 2009 Professor Michael E. Porter
Macroeconomic Competitiveness: Saudi Arabia Social Infrastructure and Political Institutions Macroeconomic Policies Social policies have addressed poverty and basic social needs, but basic education and health remain weaknesses Saudi Arabian macroeconomic polices are generally sound, but transparency remains limited Political l institutions are improving, i but the predictability and transparency of reform is limited The budget is exposed to swings in oil revenues, which leads to pro-cyclical fiscal policies The Saudi legal system is improving, but fundamental reform is necessary Inflation has risen, exposing weaknesses in monetary policy 18 Copyright 2009 Professor Michael E. Porter
Saudi Arabia s Position Microeconomic Competitiveness 2007 2008 Estimated Microeconomic Competitiveness Index 53 36 National Business Environment 53 35 Company Operations and Strategy 54 38 Note: Rank versus 131 countries; overall, Saudi Arabia ranks 36 th in 2008 PPP adjusted GDP per capita and 36 h in Business Competitiveness. Source: Institute for Strategy and Competitiveness, Harvard University (2009) 19 Copyright 2009 Professor Michael E. Porter
Saudi Arabia Competitiveness Strengths 2007 2008 Macroeconomic competitiveness 32 35 Government surplus/deficit 1 1 (Low) Wastefulness of government spending 24 9 Public trust of politicians 22 17 Judicial independence 55 27 Microeconomic competitiveness 53 36 (Low) Brain drain 27 9 (Low) Impact of taxation on incentives to work and invest 8 12 Government procurement of advanced technology products 25 13 Flexibility of employment 7 15 Intellectual property protection 50 28 Production process sophistication 33 29 Cooperation in labor-employer relations 63 29 Quality of electricity supply 45 30 (Low) Time required to start a business 78 30 Quality of roads 38 31 Venture capital availability 39 32 Availability of scientists t and engineers 57 35 Note: Rank versus 131 countries; overall, Saudi Arabia ranks 36 th in 2008 PPP adjusted GDP per capita and 36 h in Business Competitiveness. Source: Institute for Strategy and Competitiveness, Harvard University (2009) 20 Copyright 2009 Professor Michael E. Porter
Ranking, 2008 (of 181 countries) 140 Favorable Ease of Doing Business Saudi Arabia Unfavorable 120 Median Ranking, OECD 100 80 60 40 Saudi Arabia per capita GDP rank: 32 20 Saudi Arabia Doing Business rank: 16 Saudi Arabia 2010 goal: 10 0 2007 Rank (Change) Ease of Registering Paying Trading Protecting Starting a Employing Dealing Doing Property Taxes Across Investors Business Workers with Business Borders Licenses Closing a Business Getting Credit Enforcing Contracts 24 (+8) 3 (+2) 6 (-1) 33 (+17) 49 (+25) 38 (+10) 44 (-1) 48 (-2) 82 (+25) 51 (-8) 136 (-1) Source: World Bank Report, Doing Business (2008) 21 Copyright 2009 Professor Michael E. Porter
National Cluster Export Portfolio Saudi Arabia, 1998-2006 2006 2.0% Saudi Arabia s Average World Export Share: 1.67% Oil and Gas (1.19%, 13.7%) $189,356,469 s world export market share, 1.5% 1.0% Business Services Chemical Products Plastics Saudi Arabia 0.5% Prefabricated Enclosures and Structures Construction Materials Processed Foods Agricultural Products Jewelry, Precious Metals and Collectibles 00% 0.0% Metal Mining and Manufacturing Forest Products Change In Saudi Arabia s Overall World Export Share: +0.95% -0.4% -0.2% 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% Change in Saudi Arabia s world export market share, 1998-2006 Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business Exports of US$1.1 Billion = School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics. 22 Copyright 2009 Professor Michael E. Porter
< 0.41% Share of World Export s by Cluster Saudi Arabia, 2006 041 0.41 0.84% 0.84 1.67% 1.67 3.34% > 3.34% 33 Saudi Arabia s Average World Export Share: 1.67% Jewelry & Precious Metals Apparel Fishing & Fishing Products Distribution Services Financial Services Leather & Related Products Business Services Agricultural Products Publishing & Printing Oil & Gas Transportation & Logistics Education & Knowledge Creation Chemical Products Hospitality & Tourism Information Tech. Medical Devices Lightning & Analytical Electrical Instruments Equipment Power Generation Communi- cations Equipment Biopharmaceuticals Plastics Entertainment Aerospace Vehicles & Defense Prefabricated Enclosures Building Fixtures, Equipment & Services Tobacco Motor Driven Products Furniture Textiles Heavy Construction Services Aerospace Engines Construction Materials Forest Products Heavy Machinery Production Technology Metal Manufacturing Processed Food Automotive Footwear Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions. Sporting & Recreation Goods Marine Equipment 23 Copyright 2009 Professor Michael E. Porter
Saudi Arabian Business Environment Progress in 2008 Significant efforts underway to improve the education system, especially universities Recent reforms in the financial sector, but high volatility of the domestic market is a sign of immaturity Improvements in business regulations, but much remains to be done Improved availability of ICT Some progress on encouraging g larger presence of foreign companies in the Saudi economy Some progress on cluster development, especially in areas related to oil and gas 24 Copyright 2009 Professor Michael E. Porter
Saudi Arabian Competitiveness Selected Weaknesses 2007 2008 Human development Health expenditure 119 119 Quality of primary education 74 70 Political institutions Voice and Accountability (WB) 127 126 Centralization of economic policymaking 72 54 Role of Corporations (Low) Business costs of crime and violence 46 79 (Low) Business costs of corruption 83 50 Macroeconomic policy Inflation 1 55 IT infrastructure Internet access in schools 56 77 Fixed telephone lines 72 73 Internet users per 100 population 64 58 Financial Markets Getting Credit Legal rights index 90 90 Regulation of securities exchanges 92 77 Advanced d Education Quality of math and science education 71 86 Quality of management schools 84 74 First year enrollment 73 73 Regulation Regulatory quality 78 73 Open Competition Prevalence of foreign ownership 116 98 Restrictions on capital flows 82 89 Business impact of rules on FDI 101 75 Market power of state-owned enterprises 79 Intensity of local competition 51 50 Corporate Governance Efficacy of corporate boards 72 78 Strength of auditing and reporting standards 62 55 Note: Rank versus 131 countries; overall, Saudi Arabia ranks 36 th in 2008 PPP adjusted GDP per capita and 36 h in Business Competitiveness. Source: Institute for Strategy and Competitiveness, Harvard University (2009) 25 Copyright 2009 Professor Michael E. Porter
Towards a Saudi Arabian Competitiveness Agenda Continue efforts on educational reform, including a stronger push on workforce development Make efficient capital provision to the private sector the central goal of financial market development Modernize corporate governance and reporting practices, especially in GLCs Shift the focus of business regulatory reform from discrete process improvements to improving the overall regulatory experience Use FDI attraction and the promotion of new business formation to challenge legacy market structures with little competitive pressure Create a comprehensive cluster development program to drive deeper competitiveness improvement and provide the structure for economic diversification 26 Copyright 2009 Professor Michael E. Porter
Clusters and Economic Diversification Upgrade the Quality and Efficiency of Existing Export Products and Services Upgrade Local Industries / Clusters Broaden Existing Clusters, (Including Resources Clusters) Build Clusters Around Strong MNCs Develop Related Clusters Invest in Enabling Conditions Where the Country Has Cluster Specific Advantages Build Positions in Clusters that are Strong in Neighboring Regions 27 Copyright 2009 Professor Michael E. Porter
Towards a Saudi Arabian Competitiveness Agenda Continue efforts on educational reform, including a stronger push on workforce development Make efficient capital provision to the private sector the central goal of financial market development Modernize corporate governance and reporting practices, especially in GLCs Shift the focus of business regulatory reform from discrete process improvements to improving the overall regulatory experience Use FDI attraction and the promotion of new business formation to challenge legacy market structures with little competitive pressure Create a comprehensive cluster development program to drive deeper competitiveness improvement and create the structure for economic diversification Unleash entrepreneurship and SME development 28 Copyright 2009 Professor Michael E. Porter
Emerging Companies and Competitiveness Emerging companies: are a crucial driver of competitiveness improvement create most of the new jobs in advanced economies increase the intensity of competition are the backbone of clusters Creating a culture of entrepreneurship in Saudi Arabia is a crucial priority 29 Copyright 2009 Professor Michael E. Porter
Entrepreneurship in Saudi Arabia The Opportunity Large, youthful and growing population Growing markets with many undefended niches Stable economy with a prudent investment posture Modest income taxes Large and sustained government investments in the economy Increasing foreign interest in investing in the Middle East Emerging venture capital industry Opportunity to serve the entire region 30 Copyright 2009 Professor Michael E. Porter
Entrepreneurship in Saudi Arabia Constraints Culture Absence of an entrepreneurial culture Skills Lack of a skilled Saudi workforce Absence of general and industry specific training programs for employees Regulatory Processes Still cumbersome government regulation, red tape, and user experience Infrastructure for Entrepreneurship Lack of program and supporting institutions for start-up and emerging companies e.g, incubators, technical assistance, and entrepreneur networks Lack of public visibility ibilit and media coverage of emerging companies Cluster Development Lack of supplier development programs at large companies Absence of cluster collaboration organizations providing support to SMEs 31 Copyright 2009 Professor Michael E. Porter
The State of Entrepreneurship in Saudi Arabia The Saudi Fast Growth 100 In January 2008, at last year s Global Competitiveness Forum, we committed to a process to identify entrepreneurial companies. SAGIA, AlWatan, and Next Economics set out to create the Saudi Fast Growth 25, which were the fastest growing, private companies in the Kingdom. Winners are ranked according to their revenue growth and each company goes through a rigorous qualification process. The list shines a spotlight on a new generation of companies that are creating jobs and spurring innovation and growth. Instead of 25 fast growth companies, 95 companies qualified. 32 Copyright 2009 Professor Michael E. Porter
The Saudi Fast Growth 100 Fast Growth Companies 45 5 years and older Minimum of 4 million SAR (largest 3 billion SAR) 40% compound annual growth rate Created 15,000 jobs in the past 5 years Fast Growth Start Up Companies 27 Less than 5 years old 198% average growth from 2006 to 2007 Minimum of 2 million SAR (largest 1.3 billion SAR) Winners are ranked according to their revenue growth and each company goes through a rigorous qualification process. Fast Growth Companies to Watch 23 Up and coming.
Saudi Fast Growth Companies Facts & Figures Average entrepreneurial age at founding 32 years There are 8 women founders Winners are 100% college graduates, half with master s degrees More than half have founded more than one company About 25% plan to go public 80% plan to launch another business in the next 2 years Most common industries: High Tech & Telecom 23% Construction & Engineering 12% Health & Education 10% Management Consulting 10% 34 Copyright 2009 Professor Michael E. Porter
Towards a Saudi Arabian Competitiveness Agenda Continue efforts on educational reform, including a stronger push on workforce development Make efficient capital provision to the private sector the central goal of financial market development Modernize corporate governance and reporting practices, especially in GLCs Shift the focus of business regulatory reform from discrete process improvements to improving the overall regulatory experience Use FDI attraction and the promotion of new business formation to challenge legacy market structures with little competitive pressure Create a comprehensive cluster development program to drive deeper competitiveness improvement and create the structure for economic diversification Unleash entrepreneurship and SME development Move from 10 by 10 to a broader competitiveness strategy 35 Copyright 2009 Professor Michael E. Porter