Bulgarian Competitiveness: A Framework and Preliminary Evidence Professor Michael E. Porter Harvard Business School Visit of President of Bulgaria Rosen Plevneliev Boston, MA September 27, 2012 This presentation draws on ideas from Professor Porter s articles and books, in particular, The Competitive Advantage of Nations (The Free Press, 1990), Building the Microeconomic Foundations of Competitiveness, in The Global Competitiveness Report (World Economic Forum), Clusters and the New Competitive Agenda for Companies and Governments in On Competition (Harvard Business School Press, 2008), 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
Agenda Bulgaria s Performance Diagnosing Competitiveness 2
PPP-Adjusted GDP per Capita, 2010 ($USD) Prosperity Performance EU Countries $50,000 EU Average: 4.55% Luxembourg (5.16%, $87.716) $45,000 Netherlands Ireland $40,000 $35,000 Austria Belgium Denmark Sweden Germany Finland France United Kingdom $30,000 $25,000 $20,000 $15,000 Italy Spain Cyprus Slovenia Greece Malta Czech Republic Portugal Poland Estonia Hungary Latvia EU Average: $30,809 Slovakia Lithuania Bulgaria Romania $10,000 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% Source: EIU (2012); author s calculations Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2000-2010 3
Index of Inequality (2006)* 60 55 50 45 40 35 30 25 High inequality Honduras Income Inequality Selected Countries Colombia Panama Chile Paraguay Nicaragua Ecuador Dominican Republic Mexico Costa Rica Bolivia El Salvador Argentina Venezuela Peru China Guatemala USA Philippines Russia Turkey Kyrgyz Republic Uruguay Kazakhstan Cambodia Ukraine Malaysia Georgia Indonesia Latvia Portugal Romania Jordan Serbia India Vietnam Bosnia Macedonia Lithuania Moldova Greece Taiwan Poland Egypt Bangladesh UK Estonia Tajikistan Ireland New Zealand Italy Albania Pakistan Spain Bulgaria Hungary Australia Croatia Slovenia France Belgium Germany Slovakia Netherlands Finland Austria Czech Rep. Sweden Low inequality 20-10 -5 Worsening 0 Improving 5 10 15 Brazil Change in Inequality, 2006 versus 2002 Note: * latest data available used (in some cases earlier years data used) Source: World Bank, World Development Indicators, 2008, United Nations University (UNU-WIDER) 4 Denmark Jamaica
Labor Force Participation (2010) Workforce Participation EU Countries 57.0% Declining Participation EU Average: 2.02% Improving Participation Germany 52.0% Denmark Finland Czech Republic Sweden United Kingdom Lithuania Slovakia Portugal Estonia Belgium Ireland Spain Latvia Cyprus 47.0% France Netherlands Poland Slovenia EU Average: 47.57% 42.0% Italy Luxembourg Romania Greece Austria Hungary Malta 37.0% Bulgaria 32.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% Source: EIU (2012), author s calculations Change in Labor Force Participation Rate, 2000-2010 5
Unemployment Rate (%), 2010 20.0% 18.0% Bulgaria Unemployment Performance EU Countries Slovakia EU Average: 0.99% 16.0% Lithuania 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% Romania Poland Slovenia Italy Finland Czech Republic Germany Denmark Malta Austria Greece France Belgium Sweden Latvia Estonia United Kingdom Cyprus Netherlands Hungary Luxembourg Spain Portugal EU Average: 9.19% 2.0% Improving Worsening 0.0% Unemployment Unemployment -10.0% -8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% Ireland Source: EIU (2012), author s calculations Change in Unemployment Rate in Percentage Points, 2000-2010 6
Intermediate Indicators and Enablers of Productivity Productivity Domestic investment Exports Imports Domestic innovation Inbound foreign direct investment Outbound foreign direct investment Country Competitive Environment 7
Gross Fixed Investment (% of GDP), 2010 26.0% 24.0% Domestic Investment Performance EU Countries EU Average: -3.06% Czech Republic 22.0% Spain Slovakia Slovenia Romania Bulgaria 20.0% 18.0% Portugal Estonia Malta Hungary Latvia Poland Austria Netherlands Germany Belgium Italy Finland Luxembourg Sweden Denmark France Cyprus EU Average: 19.13% 16.0% Lithuania 14.0% Greece United Kingdom 12.0% Ireland Decreasing Increasing 10.0% Domestic Investment Domestic Investment -12.0% -10.0% -8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% Note: Includes inbound FDI Source: EIU (2012) Change in Gross Fixed Investment (% of GDP), 2000-2010 8
Exports of Goods and Services (% of GDP), 2010 120.0% Export Performance EU Countries EU Average: 5.12% Luxembourg (14.99%, 164.99%) 100.0% Ireland Malta Hungary 80.0% Estonia Belgium Slovakia Netherlands 60.0% 40.0% Cyprus Finland Denmark Sweden Romania Czech Republic Slovenia Bulgaria Latvia Austria Germany Poland Lithuania EU Average: 59.34% 20.0% Spain France Greece Portugal United Kingdom Italy Decreasing Exports Increasing Exports 0.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% Source: EIU (2012), authors calculations Change in Exports of Goods and Services (% of GDP), 2000-2010 9
Imports of Goods and Services (% of GDP), 2010 100.0% 90.0% Import Performance EU Countries Malta EU Average: 2.29% Luxembourg (4.81%, 133.80%) 80.0% Ireland Hungary Belgium Slovakia 70.0% Estonia Netherlands Lithuania Czech Republic Slovenia 60.0% Bulgaria Latvia EU Average: 57.11% 50.0% 40.0% Cyprus Portugal Austria Denmark Sweden Poland Romania Germany Finland 30.0% Greece Spain Italy France United Kingdom Decreasing Imports Increasing Imports 20.0% -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% Source: EIU (2012), authors calculations Change in Imports of Goods and Services (% of GDP), 2000-2010 10
Average U.S. utility patents per 1 million population, 2007-2009 6 Decreasing Number of Patents Innovative Output Selected Countries Malaysia Increasing Number of Patents 5 4 3 Croatia Bulgaria 2 1 South Africa Russia Argentina Venezuela Belarus Ukraine Ecuador Peru Indonesia Egypt Lithuania Costa Rica United Arab Emirates Slovakia Estonia Uruguay Saudi Arabia Brazil Romania Thailand Philippines Kenya Colombia Chile CAGR of US-registered patents, 1999-2009 Source: USPTO (2010), Groningen Growth and Development Centre, Total Economy Database (2010) 11 China India 0-15% -5% 5% 15% 25% 35% 45% 10,000 patents (avg. 1999 2009) =
Inward FDI Stocks as % of GDP, Average 1999-2009 80.0% Inbound Foreign Investment Performance Stocks and Flows, EU Countries EU Average: 29.76% Netherlands Malta 70.0% Estonia 60.0% Hungary Cyprus 50.0% EU Average: 49.00% Czech Republic Denmark Sweden Bulgaria 40.0% 30.0% 20.0% Slovakia Portugal France United Kingdom Spain Latvia Poland Lithuania Romania Finland Austria Slovenia Germany 10.0% Italy Greece 0.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% Source: UNCTAD, World Investment Report (2011) FDI Inflows as % of Gross Fixed Capital Formation, Average 1999-2009 12
Agenda Bulgaria s Performance Diagnosing Competitiveness 13
What Determines Competitiveness? Endowments Endowments, i.e. natural resources, geographical location, and size, create a foundation for prosperity, but true prosperity is created by productivity in the use of endowments 14
What Determines Competitiveness? Macroeconomic Competitiveness Monetary and Fiscal Policies Human Development and Political Institutions Endowments Macroeconomic competitiveness sets the economy-wide context for high productivity to emerge, but is not sufficient to achieve this outcome Endowments, i.e. natural resources, geographical location, and size, create a foundation for prosperity, but true prosperity is created by productivity in the use of endowments 15
What Determines Competitiveness? Monetary and Fiscal Policies Macroeconomic Competitiveness Fiscal Policy: Public spending aligned with revenues over time Monetary and Fiscal Policies Human Development and Political Institutions Monetary Policy: Low levels of inflation Endowments Economic Stabilization: Avoiding structural imbalances and cyclical overheating 16
What Determines Competitiveness? Macroeconomic Competitiveness Human Development and Political Institutions Monetary and Fiscal Policies Human Development and Political Institutions Human Development: Basic education, health care, equal opportunity Endowments Rule of Law: Property rights and due process Political Institutions: Stable and effective political and governmental processes and organizations 17
What Determines Competitiveness? Microeconomic Competitiveness Quality of the Business Environment State of Cluster Development Sophistication of Company Operations and Strategy Macroeconomic Competitiveness Monetary and Fiscal Policies Human Development and Political Institutions Endowments Productivity ultimately depends on improving the microeconomic capability of the economy and the sophistication of local competition revealed at the level of regions and clusters Macroeconomic competitiveness sets the economy-wide context for high productivity to emerge, but is not sufficient to achieve this outcome Endowments, i.e. natural resources, geographical location, and size, create a foundation for prosperity, but true prosperity is created by productivity in the use of endowments 18
What Determines Competitiveness? The external business environment conditions that enable company productivity and innovation Quality of the National Business Environment Microeconomic Competitiveness State of Cluster Development Sophistication of Company Operations and Strategy Macroeconomic Competitiveness Monetary and Fiscal Policies Human Development and Political Institutions Endowments 19
What Determines Competitiveness? Quality of the National Business Environment Microeconomic Competitiveness State of Cluster Development Sophistication of Company Operations and Strategy A critical mass of firms and institutions in each field to harness efficiencies and externalities across related entities Macroeconomic Competitiveness Social Monetary Infrastructure and Fiscal and Political Policies Institutions Human Macroeconomic Development and Policies Political Institutions Endowments 20
What Determines Competitiveness? Quality of the National Business Environment Microeconomic Competitiveness State of Cluster Development Sophistication of Company Operations and Strategy Internal skills, capabilities, and management practices needed for companies to attain the highest level of productivity and innovation possible given external conditions Macroeconomic Competitiveness Social Monetary Infrastructure and Fiscal and Political Policies Institutions Human Macroeconomic Development and Policies Political Institutions Endowments 21
Benchmarking Competitiveness Bulgaria s Competitiveness Profile, 2011 Country Competitiveness 75 Macroeconomic Competitiveness 75 Microeconomic Competitiveness 82 Political Institutions 105 Macroeconomic Policy 39 National Business Environment 78 Company Operations and Strategy 96 Rule of Law 96 Human Development 59 Significant disadvantage Moderate disadvantage Neutral Bulgaria s GDP per capita rank is 57 th versus 132 countries Moderate advantage Significant advantage Note: Rank versus 132 countries; overall, Iceland ranks 57 th in PPP adjusted GDP per capita and 75 th in Global Competitiveness Source: Institute for Strategy and Competitiveness, Harvard University (2011), based in part on survey data from the World Economic Forum. 22
Rank in Global Corruption Index, 2010 Low corruption Corruption Perception Index, 2010 New Zealand Finland Denmark Sweden Switzerland Australia Canada Iceland Austria Hong Kong United Kingdom U.S. Germany Qatar Chile Uruguay France Slovenia Spain Estonia Israel Cyprus Botswana Costa Rica Portugal Taiwan South Korea Poland Macau Jordan Dominica Bahrain Oman Hungary Lithuania Saudi Arabia Czech Republic Turkey Malaysia South Africa Bulgaria Slovakia Croatia Italy El Salvador Brazil Romania Georgia Panama Greece China Trinidad and Serbia Colombia Thailand Peru Tobago Jamaica India Morocco Albania Swaziland Guatemala Gambia Mexico Egypt Argentina Dominican Republic Senegal Zambia Algeria Bolivia Kazakhstan Benin Indonesia Viet Nam Guyana Ethiopia Niger Armenia Syria Uganda Ecuador Belarus Nicaragua Zimbabwe Ukraine Honduras Azerbaijan Nigeria Bangladesh Nepal Philippines Paraguay Cameroon Pakistan Côte d Ivoire Haiti Laos High corruption Burundi Worsening Note: Ranks only countries available in both years (160 countries total) Source: Global Corruption Report, 2010 Russia Venezuela Kyrgyzstan Chad Sudan 23 Kenya Cambodia Guinea Improving Change in Rank, Global Corruption Report, 2010 versus 2006
Microeconomic Competitiveness Indicators Ease of Doing Business Rankings (Bulgaria, 2012) Ranking, 2010 (vs. 183 countries) 140 Favorable Unfavorable 120 100 80 60 Bulgaria s GDP per capita rank: 57 40 20 0 Ease of Doing Business Rank Getting Credit Protecting Investors Starting a Business Registering Property Paying Taxes Enforcing Contracts Resolving Insolvency Trading Across Borders Dealing with Construction Permits Getting Electricity Source: World Bank Report, Doing Business (2012). 24
World Export Market Share (current USD) 0.35% 0.30% 0.25% Processed Goods Semi-processed Goods Unprocessed Goods Services TOTAL Composition of Exports Bulgaria s Exports By Type of Good 0.20% 0.15% 0.10% 0.05% 0.00% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics. 25
World Export Market Share, 2010 0.5% Bulgaria s National Cluster Export Portfolio 2000-2010 Change in Bulgaria s Overall World Export Share: 0.07% Apparel Hospitality and Tourism Tobacco (0.70%, 1.08%) 0.4% Metal Mining and Manufacturing Power and Power Generation Equipment 0.3% Building Fixtures and Equipment Agricultural Products 0.2% Transportation and Logistics Communications Services Lighting and Electrical Equipment 0.1% Production Technology Motor Driven Products Communications Equipment Bulgaria s Overall World Export Share: 0.16% Oil and Gas Products Chemical Products Automotive 0.0% -0.05% 0.05% 0.15% 0.25% 0.35% 0.45% Change in World Export Market Share, 2000-2010 = $350 million 26
World Market Share 0.04% - 0.15% 0.16% - 0.39% > 0.40% Cluster Linkages and Economic Diversification Fishing & Fishing Products Agricultural Products Bulgaria, 2010 Hospitality & Tourism Prefabricated Enclosures Textiles Jewelry & Precious Metals Footwear Business Services Financial Services Apparel Processed Food Leather & Related Products Distribution Services Publishing & Printing Oil & Gas Transportation & Logistics Education & Knowledge Creation Chemical Products Biopharmaceuticals Plastics Information Tech. Medical Devices Entertainment Analytical Instruments Tobacco Aerospace Vehicles & Defense Communications Equipment Lightning & Electrical Equipment Building Fixtures, Equipment & Services Power Generation Motor Driven Products Furniture Aerospace Engines Heavy Construction Services Heavy Machinery Construction Materials Forest Products Production Technology Mining & Metal Manufacturing Sporting & Recreation Goods Automotive 27
Change in Share Export Value Rank Industry Cluster World Export Share (2000-2010) (in $ thousands) 1 Monofilament of ethylene Plastics 6.43% 5.77% $13,883 2 Carbonates, percarbonates Chemical Products 4.31% 4.25% $184,905 3 Cinematograph film, exposed and developed Entertainment and Reproduction Equipment 3.35% 2.43% $21,200 4 Lead Metal Mining and Manufacturing 3.14% 0.61% $174,510 5 Miscellaneous footwear with leather uppers Footwear 2.74% -0.40% $13,801 6 Pulley tackle and hoists Production Technology 2.60% 1.57% $28,960 7 Wine, cider or similar beverage making machinery Processed Food 2.51% 2.08% $5,614 8 Women s or girls blouses, shirts and shirt-blouses, knitted Apparel 2.41% 1.06% $134,417 9 Copper bars, rods and profiles Metal Mining and Manufacturing 2.41% 2.40% $134,702 10 Copper, copper anodes and alloys Metal Mining and Manufacturing 2.14% -0.18% $1,593,226 11 Copper plates, sheets and strip, 15mm+ thickness Metal Mining and Manufacturing 2.01% 2.01% $194,807 12 Miscellaneous simply shaped wood Building Fixtures and Equipment 1.95% 1.65% $4,616 13 Medicaments containing alkaloid Biopharmaceuticals 1.83% 1.78% $64,370 14 Yarn of wool or animal hair Textiles 1.83% 1.80% $56,282 15 Ceramic plumbing fixtures Construction Materials 1.82% 0.41% $70,998 16 Tobacco, unmanufactured Tobacco 1.77% 0.94% $191,240 17 Copper mattes; cement copper Metal Mining and Manufacturing 1.67% $7,366 18 Zinc Metal Mining and Manufacturing 1.65% 0.17% $189,208 19 Barley, unmilled Agricultural Products 1.61% 1.05% $79,445 20 Tobacco working machinery Production Technology 1.58% 0.81% $9,671 21 Dairy machinery Processed Food 1.57% 1.24% $8,032 22 Fuel wood, wood charcoal Forest Products 1.57% 0.17% $15,702 23 Precious metal waste and scrap Jewelry, Precious Metals and Collectibles 1.54% $192,529 24 Miscellaneous measuring, controlling and scientific instrumentsanalytical Instruments 1.49% 1.46% $121,428 25 Monofilament of vinyl chloride Plastics 1.42% 1.42% $40,260 26 Men s or boys suits and ensembles Apparel 1.41% 0.33% $61,306 27 Densified, reconstituted wood Building Fixtures and Equipment 1.39% 1.20% $90,637 28 Wheat, meslin, unmilled Agricultural Products 1.39% 1.03% $451,936 29 Parts of footwear; removable in-soles and similar articles Footwear 1.38% 0.19% $94,152 30 Electric current Power and Power Generation Equipment 1.38% $444,712 31 Other cereal meal, flours Processed Food 1.21% 1.19% $12,103 32 Women s or girls jackets Apparel 1.19% 0.43% $69,112 33 Plants for pharmacy, perfumery, or for insecticidal purposes Agricultural Products 1.16% -0.28% $23,955 34 Glass containers Processed Food 1.16% 0.65% $88,658 35 Aluminum tubes and pipes Building Fixtures and Equipment 1.14% 1.13% $22,441 36 Household glassware Building Fixtures and Equipment 1.11% 1.03% $92,815 37 Men s or boys jackets and blazers Apparel 1.05% 0.41% $44,091 38 Oilseed (soft fix vegetable oil) Agricultural Products 1.04% 0.95% $562,108 39 Rice in the husk Agricultural Products 1.02% 0.98% $10,465 40 Cigarettes containing tobacco Tobacco 0.98% 0.81% $167,103 28 Established Bulgarian Export Products Leading Exports by World Share, 2010