Measures of Competitiveness

1 Copyright 2004 © Christian H. M. KetelsBaltic Sea Region Report – HH Conference 09-02-04 CK


Measures of Competitiveness

Productivity

Innovative CapacityInnovative Capacity

Competitiveness

ProsperityProsperity

Source: Michael E. Porter


Decomposing Prosperity

IncomeIncome

Labor Productivity

Labor Utilization

Domestic Purchasing

Power

• Consumption taxes• Local market competition• Efficiency of local industries

ProsperityProsperity

• Skills• Capital stock• TFP

• Working hours• Unemployment• Participation rate• Population age profile


Influences on CompetitivenessMultiple Geographic Levels

Broad Economic AreasBroad Economic Areas

Groups of Neighboring Groups of Neighboring NationsNations

States, ProvincesStates, Provinces

Cities, Metropolitan Cities, Metropolitan AreasAreas

NationsNations

World EconomyWorld Economy



Profile of the Region

Nordic Countries

• Denmark, Finland, Norway, Sweden

• 24 Mio. People (41% of the region)

• GDP of € 793bn (74%)

Northern Germany

• Hamburg, Mecklenburg-Vorpommern, Schleswig-Holstein

• 6.3 Mio. People (11%)• GDP of € 172bn (16%)

Northwest Russia• Northwestern Region• 16 Mio. People (27%)• GDP of € 46bn (4%)

Baltic States• Estonia, Latvia,

Lithuania• 7.4 Mio. People (12%)• GDP of € 34bn (3%)

Northern Poland• Zachodnio-Pomorskie,

Pomorskie, Warmins-ko-Mazurskie

• 5.4 Mio. People (9%)• GDP of € 24bn (2.5%)

Source: EU (2004)

Western shore Eastern shore


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

-10% -5% 0% 5% 10% 15% 20% 25%

*Growth figures exclude Baltic States and Northwest Russia Source: WTO (2004), Institute for Strategy and Competitiveness, author’s analysis.

World Market Share, 2000

Absolute Growth* of Exports, 1995 - 2000

Cluster CompositionBaltic Sea Region Export Performance by Cluster

EntertainmentTransportation

Food & Beverages

Forest Products

Health CareMultiple Business

Materials & Metals

Petroleum/Chemicals

Power

Semiconductors

Telecommunication

Textiles & ApparelOffice

Household

Personal

BSR overall: +2.1% (versus +5.3% world trade)

BSR overall: 5.36%


Regional CooperationLevels

Stage 3: Joint action• Limited independence• Includes joint positioning of the region abroad, including in international/

supranational bodies

Stage 2: Coordinated action

• Medium level of independence• Includes joint efforts to upgrade border procedures, improve infrastructure,

develop clusters, ..

Stage 1: Learning and benchmarking

• Leaves national autonomy fully intact• Includes networks covering all areas of policy in an “open model of

cooperation”

Countries act in isolation

Countries act as one


HighLow

Regional CooperationBenefits and Costs of Regional Heterogeneity

Degree of Heterogeneity

• Easy to develop a common identity

• Easy applicability of others’ experience

• Balanced distribution of benefits

• Regional cooperation is easier but provides fewer benefits

• Huge potential gains from regional benchmarking

• Huge potential gains from division of labor

• Regional cooperation is harder but provides higher benefits


Situation Implications of the Report

Key Implications

Stage 3: Joint action

Stage 2: Coordinated

action

Stage 1:Learning and benchmarking

• More ambition than reality

• Some activities currently under way

• Many activities currently under way

• Current patterns of heterogeneity suggest high benefits but also difficulties in achieving joint action

• High level of regional integration signals room for development of strategic action plan

• High remaining heterogeneity in the region signals ample room for further cooperation


The Way Ahead

BDF Meeting Hamburg 2004• Launch of the 1st State of the Region-

Report• Set a structure for the regional debate• Provide data to review performance,

cluster composition, and business environment quality across the Region

BDF Meeting Stockholm 2005• 2nd State of the Region-Report• Provide data to discuss the positioning of

the Baltic Sea Region• Provide data to set regional action

priorities • Provide data on current regional efforts

Ongoing discussions in the Region• Validate the performance and business

environment quality assessment• Identify areas for further in-depth analysis• Develop the foundations for an

institutional capacity to act

Moving to Action• Launch meetings to define a regional

strategy for action • Launch institutional structure to

coordinate decision making and implementation


The Baltic Sea Region Entering a New Era

Past Present

• Ties in the region far below historical precedents

• Enthusiasm about freedom and opportunity in the East

• Main goal is political: integrate and secure

• West providing help to East; East providing new markets and access to low-wage labor

• Many trade and organizational ties across the region

• Realism about benefits raises demands on cooperation

• Main goal is economic: raise prosperity across the region

• West and East operating with same objectives from different points of departure


Towards A New Strategy for the Baltic Sea Region

• How strong is the economic performance of the Baltic Sea Region?

• What is the profile of the economy in the Region?

• What are the strengths and weaknesses of the business environments across the Region?

• What are the implications for a sound regional strategy?


Real GDP Development Over TimeBaltic Sea Region Countries, 1993 - 2003

70%

85%

100%

115%

130%

145%

160%

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

PolandLatviaEstoniaFinlandLithuaniaNorwaySwedenDenmarkGermanyRussia

EU 25

Source: Groningen Growth and Development Centre and The Conference Board (2004), EIU (2004), authors’ calculations

Sorted by CAGR,1993 – 2003:

Real GDP, PPP-adjusted, 1993 = 100


Key ObservationsProfile of the Region

• Clear dominance of the Nordic countries in the overall Baltic Sea Region economy

– Countries on the eastern shore still account for only 10% of the regional economy

– In addition, Germany, Poland, and Russia all have their economic centers of gravity outside the Region

• Overall growth performance of economies in the Region suggests dominance of nation-specific over regional factors

– Among western shore countries, Nordic countries did in general better than Germany but even among them differences emerge

– Among the eastern shore countries, Poland and the Baltic countries followed different paths. Lithuania in particular stands out with its late bounce-back from the transition crisis


ProsperitySelected European Regions and Countries

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

0% 1% 2% 3% 4% 5% 6% 7% 8%

Estonia

Baltic Sea RegionIberian Peninsula

Central Europe

British Isles

NorwayDenmark

Finland

Poland (North)

Russia (Northwest)

LithuaniaLatvia

SwedenGermany (North)

Real GDP per Capita 2003, PPP-adjusted, $-US (1999)

Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2000-2003Source: Groningen Growth and Development Centre and The Conference Board (2004), authors’ calculations


Key FindingsPerformance Drivers

• Labor utilization - employees per capita and hours worked per employee are highest of all peer regions

– Gap to Iberian Peninsula and British Isles is, however, falling; it is slightly increasing versus Central Europe

• Labor productivity is on par with Central Europe and Iberian Peninsula, lagging the British Isles

– Baltic Sea Region is currently improving its position versus peer regions

• Domestic purchasing power of income is lowest of all peer regions

– Gap to Iberian Peninsula and British Isles is, however, falling; it is slightly increasing versus Central Europe

Advantages

Disadvantages


Economic PerformanceDecomposition by Baltic Sea Sub-region

Nordic countries Germany Poland Baltic

countries Russia

Labor Productivity ++ ++ - - - - - - - -

Employees per capita =0 - - + +

Hours worked per Employee

- - + + +

Domestic Purchasing

Power- - ++ +++ ++

Prosperity (% of Region) 154% 150% 53% 53% 37%

Note: +++ for >150% above Baltic Sea Region average, ++ for > 50%, + for > average, - for < average, - - for < 30%, - - - for < 50%Source: Groningen Growth and Development Centre and The Conference Board (2004), national statistics (2004), authors’ calculations


0

50

100

150

200

0% 5% 10% 15% 20%

Note: Bubble size is relative to total U.S. patents filed in 2002; sub-national region shares by GDP share Source: USPTO (2004), author’s analysis.

U.S.Patents filed per Capita, 2003

Growth of U.S. Patents Filed per Capita, CAGR, 1998 - 2003

Innovation PerformancePatenting in the U.S.

Estonia

Central Europe

British Isles

Norway

Denmark

Finland

Russia (Northwest)Lithuania

Sweden

Iberian Peninsula

Baltic Sea Region

Germany (North)

Poland (North)


Innovation PerformanceTop Patenting Organizations

ERICSSON Sweden 1246

NOKIA Finland 809

NOVO NORDISK A/S Denmark 553

VALMET CORP. Finland 273

SANDVIK AKTIEBOLAG Sweden 236

AKTIEBOLAGET ASTRA Sweden 202

BEIERSDORF AG Germany 136

ASEA BROWN BOVERI AB Sweden 133

AB VOLVO Sweden 126

ERICSSON, INC. Sweden 99

TETRA LAVAL Sweden 96

DANFOSS A/S Denmark 95

SIEMENS ELEMA AB Sweden 94

AKTIEBOLAGET ELECTROLUX Sweden 90

DRAGERWERK AG Germany 83

PACESETTER AB Sweden 81

PHARMACIA & UPJOHN AB Sweden 75

KVAERNER PULPING AKTIEBOLAG Sweden 74

HALDOR TOPSOE A/S Denmark 71

U.S. Patents, 1997-2001Company Country

Source: USPTO (2004), author’s analysis.


Other Economic Indicators World Export Market Share over Time

2%

3%

4%

5%

6%

7%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Central Europe

British Isles

Iberian Peninsula

Baltic Sea Region

Source: WTO (2004), author’s analysis.

World Export Market Share


Other Economic Indicators Relative Export Intensity

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Share of World Exports versus Share of World GDP, 2001

Source: WTO (2004), EIU (2004), author’s analysis.


0%

10%

20%

30%

40%

50%

60%

0% 20% 40% 60% 80%

Note: Bubble size is relative to FDI stock in 2001; subnational regions by their share of national GDP Source: UNCTAD (2004), author’s analysis.

Inward FDI stock as % of GDP, Average

1999-2001

Inward FDI Flows as % of Domestic Capital Formation, Average 1999-2001

Other Economic Indicators Inward FDI Position

EstoniaBritish Isles

Norway

Denmark

FinlandPoland (North)

Russia (Northwest)

Lithuania

Latvia

Sweden

Baltic Sea RegionIberian Peninsula

Germany (North)

Central Europe


Other Economic Indicators Multinational Companies’ Home Base

Business Week 1000 Fortune Global 500

British Isles 77

Baltic Sea Region 30• Sweden 15• Finland 5• Norway 5• Denmark 4• Northern Germany 1

Iberian Peninsula 13

Central Europe 11

British Isles 36

Baltic Sea Region 15• Sweden 6• Finland 4• Denmark 2• Norway 2• Northern Germany 1

Iberian Peninsula 7

Central Europe 7

Note: Business Week ranks by Market Value, Fortune by Revenues Source: Business Week (2004), Fortune (2004), author’s analysis.


The Composition of Economies

Local industries• Do not compete

across regions• Tied to location• Dominated by

services• More critical for

prosperity than for income

68% of employment

57% of income

31% of employment

42% of income

Cluster• Compete across

regions/countries• Can locate

anywhere• Strong role of

manufacturing• Critical for income

Source: Michael E. Porter, Economic Performance of Regions, Regional Science (2004), Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School

Natural-resource based industries• 1% of income and __employment


Nordic

TelecomForest ProductsHealth CareOil/ChemicalsFood ProductsDefensePowerHouseholdMetalsMultiple Bus.EntertainmentOfficeSemiconductorTransportationTextilesPersonal

Germany

SemiconductorTransportationOfficePersonalMultiple Bus.TextilesEntertainmentPowerHealth CareHouseholdMetalsFood ProductsOil/ChemicalsForest ProductsTelecomDefense

Russia

DefenseOil/ChemicalsMetalsMultiple Bus.Forest ProductsPersonalFood ProductsPowerTextilesTransportationEntertainmentSemiconductorHouseholdOfficeHealth CareTelecom

Baltic

TextilesForest ProductsHouseholdFood ProductsEntertainmentTelecomMetalsPersonalPowerOil/ChemicalsOfficeTransportationHealth CareSemiconductorMultiple Bus.Defense

Relative Cluster SpecializationBaltic Sea Sub-Regions

Poland

TextilesEntertainmentPersonalHouseholdMetalsTransportationPowerDefenseFood ProductsForest ProductsMultiple Bus.OfficeSemiconductorOil/ChemicalsHealth CareTelecom

Higher share

Lower Share

Source: WTO (2004), Institute for Strategy and Competitiveness, HBS (2004), author’s analysis.


Microeconomic Foundations of Development

Quality of the Quality of the MicroeconomicMicroeconomic

BusinessBusinessEnvironmentEnvironment

SophisticationSophisticationof Companyof Company

Operations andOperations andStrategyStrategy

Determinants of Productivity and Productivity Growth

Macroeconomic, Political, Legal, and Social Macroeconomic, Political, Legal, and Social Context for DevelopmentContext for Development

• A sound macroeconomic, political, legal, and social context creates the potential for competitiveness, but is not sufficient

• Competitiveness ultimately depends on improving the microeconomic capability of the economy and the sophistication of local companies and local competition



Business Competitiveness IndexRanking of European Regions and Countries

Baltic Sea Region British Isles Central Europe Iberian Peninsula

TOTAL RANK 6

Finland 1

Sweden 3

Denmark 4

Germany 5

Norway 22

Estonia 28

Latvia 29

Lithuania 40

Poland 46

Russian Federation 63

TOTAL RANK 9

United Kingdom 6

Ireland 21

TOTAL RANK 21

Germany 5

Austria 17

Slovenia 30

Czech Republic 35

Hungary 38

Slovak Republic 42

Poland 46

TOTAL RANK 27

Spain 25

Portugal 36

Source: Global Competitiveness Report (2003), author’s analysis.


Context for Context for Firm Firm

Strategy Strategy and Rivalryand Rivalry

Related and Supporting Industries

FactorFactor(Input) (Input)

ConditionsConditionsDemand Demand

ConditionsConditions

Business Environments’ in the Baltic Sea RegionKey Observations

+ Strong physical infrastructure, especially for communication

+ High skill base of the labor force+ Well developed science system+ Public servants apply laws with

neutrality; low level of corruption– Significant level of bureaucracy– Emerging weaknesses in the

education system+ Presence of a number of globally

competing cluster + Strong basis for the activation of

existing clusters

+ Companies competing globally on innovation and differentiation

+ High formal openness of markets– Low rivalry on many local markets– High level of taxation, especially on

labor, reduces incentives– Presence of distortive subsidies,

especially in Germany and Russia + Demanding regulatory standards, especially on environmental issues

– Buyer sophistication, including government procurement, is only average



0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

-2% 0% 2% 4% 6% 8%

Lithuania

Factor Conditions Spending on Human Resources

Growth in Spending on Human Resources, CAGR 1995-2001

Baltic Sea Region

Estonia

Norway

Denmark

Finland

Poland (North)Latvia

Public expenditure on education

as % of GDP, 2001

Central Europe

Iberian Peninsula British Isles

Germany (North)

Sweden

Source: EU Structural Indicators (2004), author’s calculation


Factor ConditionsAverage of Reading, Scientific, and Mathematical Literacy

400

420

440

460

480

500

520

540

560

Average Educational Attainment, 2000

Source: OECD PISA-Study (2003), author’s calculation

OECD average


Context for Strategy and RivalryMarket Pressure

Baltic Sea Region Nordic Germany Baltic Poland Russia

Effectiveness of Anti-Trust Policy 10

Hidden Trade Barrier Liberalization 11

Foreign Ownership of Companies 12

Intensity of Local Competition 18

Tariff Liberalization 20

Administrative Burden for Start-Ups 22

Extent of Locally Based Competitors 23

Extent of Distortive Subsidies 29

11

10

16

22

24

21

37

17

5

13

11

13

15

34

4

93

43

41

52

39

38

34

46

26

45

52

47

51

45

52

46

78

73

79

93

83

76

84

48

70

• Nordic and Germany both formally open for competition but effective competitive pressure is significantly lower in Nordic countries

• High differences in competitive intensity among Baltic countries, Poland, and Russia



Context for Strategy and Rivalry Taxes on Production

0%

5%

10%

15%

20%

25%

30%

35%

40%

Direct Taxes and Social Security Contributions as % of GDP, 2002

Source: Eurostat (2004), author’s analysis.

Social security contributionsDirect taxes (labor, capital)


Context for Strategy and RivalryFlexibility of Firing

0

10

20

30

40

50

60

70

80

Baltic

Sea R

egion

Denmark

Norway

Sweden

Lithu

ania

Poland

Latvi

a

German

y

Finlan

d

Russia

British

Isles UK

Irelan

d

Centra

l Euro

pe

Austria

Hunga

ry

Czech

Rep

ublic

Poland

Sloven

ia

German

y

Slovak

Rep

ublic

Iberia

n Pen

isulaSpa

in

Portug

al

Less flexible

More flexible

Source: World Bank (2004), author’s analysis.


EU-14 + Norway

Overall Cluster Strength in EuropeGCR Ranking

245789101415171821254151

FinlandItaly

GermanyDenmarkSweden

United KingdomFranceAustria

NetherlandsSpainIreland

BelgiumNorwayPortugalGreece

Accession Countries

313233344044455368

Czech RepublicLithuania

LatviaPoland

Slovak RepublicEstoniaSloveniaHungary

Malta

Source: Global Competitiveness Report 2003/04 , Institute for Strategy and Competitiveness (2004)


Innovation Capacity

1

5

10

20

15

25

30

35

40

Rank on InnovationCapacity Index, 2003

Source: Michael E. Porter/Scott Stern (2003), author’s calculations


Germany Nordic countries Baltic countries Poland Russia

30

Rank on InnovationCapacity Sub-indices, 2003

1

10

20

40

50

60

70

80

Innovation Capacity Sub-Index by Country or Sub-Region

Source: Michael E. Porter/Scott Stern (2003), author’s calculations

Proportion of Scientists and Engineers Index

Innovation Policy IndexCluster Innovation Environment Index

Innovation Linkages IndexOperations and Strategy Index


Source: EU Innovation Scoreboard 2003, author’s calculation

Annual Growth of Gross Domestic R&D Spending, average of three preceding years - 2001

Factor ConditionsTotal R&D Spending

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

-10% 0% 10% 20% 30%

Gross Domestic R&D Expenditure as % of GDP, 2001 (or latest available)

British Isles

Nordic

Baltic StatesIberian Peninsula

Germany (North)

Central Europe

Poland (North)

Baltic Sea Region


Factor ConditionsShare of R&D Spending by Business

0%

10%

20%

30%

40%

50%

60%

70%

80%

Source: EU Innovation Scoreboard 2003, author’s calculation

Business Share of Total R&D Spending, 2001 (or latest available)

Documents

Measures of Competitiveness