Michael Porter, Entrepreneurship and Competitiveness, GCF2012 Presentation

1 Copyright 2012 © Professor Michael E. Porter 20120124 – Saudi Arabia GCF 2012 – FINAL – Prepared by C. Ketels and J. Hudson

Professor Michael E. Porter Harvard Business School

Global Competitiveness Forum

Riyadh, Saudi Arabia January 24, 2012

Entrepreneurship and Competitiveness:

Implications for Saudi Arabia

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

http://www.isc.hbs.edu/








The World Economy in Early 2012

• A weak macroeconomic environment is constraining growth in the

global economy (e.g., Europe, US, China)

– Failures of political leadership

• However, sustainable fiscal policies are necessary but not sufficient

to restore healthy growth

• The only way to ensure long term job and prosperity growth is through

fundamental improvement in competitiveness, especially for higher

income economies


What is Competitiveness?

• Competitive businesses create rising incomes and good jobs

• Nations compete to offer the most productive environment for business

• Competitiveness is not a zero sum game

• Competitiveness is manifested in the ability of companies operating in a country or region

to compete successfully in international markets while simultaneously improving the

living standards of citizens

• Competitiveness depends on the long term productivity with which a nation uses its

human, capital, and natural resources

– Competitiveness is not achieved through low wages or low currency

– Productivity sets sustainable wages and standard of living

– 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 benefits from a combination of domestic and

foreign firms


• Productivity ultimately depends on improving the microeconomic capability of the economy and the

sophistication of local competition

• Macroeconomic competitiveness sets the potential for high productivity, but is not sufficient

• Endowments create a foundation for prosperity, but true prosperity is created by productivity in the use

of endowments

What Determines Competitiveness?

Macroeconomic Competitiveness

Microeconomic Competitiveness

Sophistication

of Company

Operations and

Strategy

Quality of the

National

Business

Environment

Social

Development

and Political

Institutions

Macroeconomic

Policies

State of Cluster

Development

Endowments


Saudi Arabia’s Progress on Competitiveness

• Competitiveness has become central to Saudi Arabia’s economic policy agenda

• Substantial reforms have been implemented in areas like infrastructure,

market opening, legal reform, business regulation, education, and financial

markets


World Bank Doing Business Indicators Saudi Arabian Doing Business Ranking, 2005 - 2012

Note: Rankings include total of 183 countries.

Source: World Bank, SAGIA

2005 2006 2007 2008 2009 2010 2011 2012

118

38

23

15 12

38

13 10






markets

• Saudi Arabia has established a base of home-grown private sector

businesses, together with state-controlled companies and multinationals that

are operating in the country






markets




• However, boosting prosperity growth and job creation remain critical priorities


PPP-adjusted GDP per

Capita, 2010 ($USD)

Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2000 - 2010

Prosperity Performance Selected Middle Income Countries

South Korea

Cyprus

Slovenia New Zealand

Greece

Czech Republic Portugal

Bahrain

Oman

Saudi Arabia Slovakia

Poland

Hungary Estonia

Croatia Lithuania

Panama Mexico Argentina Russia Chile

Malaysia Latvia

Uruguay Belarus Trinidad & Tobago

Lebanon Turkey

Bulgaria Kazakhstan

Venezuela

Romania Dominican Republic Brazil

South Africa Costa Rica

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000

$22,000

$24,000

$26,000

$28,000

$30,000

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%

Source: EIU (2011), author’s calculations

UAE (-0.9%, 56,500)

Average: $18,163

Average: 5.4%


Furniture Building

Fixtures,

Equipment &

Services

Fishing &

Fishing

Products Hospitality

& Tourism Agricultural

Products Transportation

& Logistics

Saudi Arabia’s Share of World Exports by Cluster, 2009

Plastics

Oil &

Gas

Chemical

Products

Biopharma-

ceuticals

Power

Generation

Aerospace

Vehicles &

Defense

Lightning &

Electrical

Equipment

Financial

Services

Publishing

& Printing

Information

Tech.

Communi-

cations

Services

Business

Services

Distribution

Services

Forest

Products

Heavy

Construction

Services

Construction

Materials

Prefabricated

Enclosures

Apparel

Leather &

Related

Products

Jewelry &

Precious

Metals

Textiles

Footwear

Processed

Food

Tobacco

Medical

Devices

Analytical

Instruments Education &

Knowledge

Creation

Note: Saudi Arabia’s overall share of world exports is 1.268%.

Marine

Equipment

Aerospace

Engines

Heavy

Machinery

Sporting

& Recreation

Goods

Automotive

Production

Technology

Motor Driven

Products

Mining & Metal

Manufacturing

> 5.0%

Enter-

tainment

World Market Share

1.27% - 5.0%

0.2% - 1.26%






markets




• However, boosting prosperity growth and job creation remain critical priorities

• Stimulating entrepreneurship is central to reap the full benefits of these

competitiveness reforms


Competitiveness and Entrepreneurship

Competitiveness Entrepreneurship

• Creates the necessary

context for entrepreneurship

to emerge and prosper

• Drives competitiveness

upgrading

• Builds out clusters

• Enables economic

diversification

• Fundamental to large scale

job growth


What Drives Entrepreneurship? Measures to Upgrade the Business Environment for Entrepreneurs

Context for Firm Strategy and Rivalry

Related and Supporting Industries

Factor (Input)

Conditions

Demand Conditions

• Government and private

sector procurement

policies open to SMEs

• Availability of funding − Access to lending

− Angel funding

− Organized risk capital

• Strong incentives − Low taxes on capital gains

− Strong IP protection

• Public recognition of

entrepreneurial success • Entrepreneurship education

• Mentorship programs

• Entrepreneur networks

• Policies to ease new

business formation − Ease of incorporation

− Ease of doing business

− Corporate and bankruptcy laws

• Availability of support

services such as legal and

business services

• A cluster-based

development model


Entrepreneurship in Saudi Arabia The Opportunity

• Stable economy with a prudent financial structure

• Large, youthful and growing population

• Growing markets with many unserved niches

• No income taxes

• Emerging venture capital industry

• Large and sustained government investments in the economy

• Increasing foreign interest in investing in the Middle East

• Opportunity to serve the entire region from a base in the largest economy


• Competitiveness upgrading in the Saudi economy has enabled

entrepreneurship to take root

Entrepreneurship in Saudi Arabia Current Situation


Entrepreneurship Profile in the GCC Region Findings from the Saudi Fast Growth 100 and the Arabia 500

Source: Arabia 500

• Academic background often in engineering or business

• Worked 3-5 years for a global firm before launching their enterprise at 30,

often in a related industry

• Creatively configured products and services that are tailored to local

market conditions

• World class operating practices akin to those of multinationals

• Persistence and agility in order to compete with large incumbents

• International networks of business partners and associates


• Competitiveness upgrading in the Saudi economy has enabled

entrepreneurship to take root

• Entrepreneurs are making an important contribution to diversifying the

economy (services, non-resource industries)

• Entrepreneurs are creating a mechanism for Saudi Nationals to enter the

private sector

• However, further efforts to improve the context for entrepreneurs are critical

in order for entrepreneurship to reach its full impact on the Saudi economy

Entrepreneurship in Saudi Arabia Current Situation


Current Efforts to Support Entrepreneurship in

Saudi Arabia

• Many of these efforts are relatively new, and bringing them to scale will be critical for

entrepreneurship in Saudi Arabia

Awareness Incubation

• Saudi Fast Growth 100

• Prince Salman bin

Abdulaziz - Young

Entrepreneur Awards

• Injaz-Saudi Program

• MIT Arab Business Plan

Competition

Financing

• Saudi Industrial

Development Fund –

Kafalah Program

• Centennial Fund

• Bab Rizq Jameel

• Riyadh Technology

Incubation Center

• Riyadh Techno Valley

• Dhahran Techno Valley

• National

Entrepreneurship

Institute

Source: “SME and Entrepreneurship Support Services in Saudi Arabia Stakeholder Mapping” report by SAGIA.


Challenges to Entrepreneurship in Saudi Arabia and

Other Emerging Economies

• Limited, but growing entrepreneurial culture

• Lack of public visibility and media coverage of emerging companies

• Risk aversion and fear of failure

• Limited skills in the Saudi workforce

• Still cumbersome government regulation and red tape

• Limited progress on cluster development, and few cluster collaboration

organizations supporting SMEs

• Lack of supplier development programs at large companies

• Risk of “crowding out” by government-linked companies and large MNCs

Source: Arabia 500


Entrepreneurship and Saudi Competitiveness Conclusions

• Entrepreneurs are crucial in order to translate Saudi Arabian progress on

competitiveness into broad-based economic growth and employment

• Saudi entrepreneurs have begun to establish themselves as an integral

part of the Saudi economy

• The future success of Saudi entrepreneurs will depend on sustained

efforts to upgrade the Saudi business environment to meet

entrepreneurs’ specific needs