1. State of the Region Report 2006 The Top of Europe in Global Competition Christian H.M. Ketels, PhD Institute for Strategy and Competitiveness Harvard Business School and Centre for Strategy and Competitiveness Stockholm School of Economics This presentation draws on joint work with Professor Örjan Sölvell and has benefited strongly from ideas developed by Professor Michael E. Porter. The State of the Region Report has been prepared for the Baltic Development Forum with financial support from the Nordic Investment Bank (NIB) and the Nordic Council of Ministers NCM). The full Report is available at www.bdforum.orgwww.bdforum.org Additional information on competitiveness research can be found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.eduwww.isc.hbs.edu

2. 2 Copyright 2006 © Christian H. M. KetelsState of the Region Report 2006 The 2006 State of the Region Report Context for Competition Current Policy Current Competitiveness Global competitive environment Geographic profile of the Baltic Sea Region Macroeconomic climate Economic performance Global markets, knowledge, integration Microeconomic capacity Lisbon-Agenda General business environment upgrading Innovation Cluster development Special focus: Russia Branding

3. 3 Copyright 2006 © Christian H. M. KetelsState of the Region Report 2006 Context for Competition: Impact on the Baltic Sea Region Nature of global Competition POSITIVE, BUT LOSING POWER Macroeconomic climate POSITIVE, BUT EMERGING RISKS Location and geographic profile NEGATIVE Globalization has provided huge opportunities for the Baltic Sea Region The tailwind is going to be weaker in the future, exposing some underlying challenges of the Region

4. 4 Copyright 2006 © Christian H. M. KetelsState of the Region Report 2006 Lisbon Agenda Current Competitiveness: The Position of the Baltic Sea Region Prosperity Prosperity generation Microeconomic capacity Knowledge creation Investment, exports Integration xxxx Strong Weak

5. 5 Copyright 2006 © Christian H. M. KetelsState of the Region Report 2006 Patents per 1000 Capita, 2005 Growth of Patents per Capita, CAGR, 2000-2005 Innovation Performance Patenting in the United States Source: USPTO (2006), author’s analysis.State of the Region-Report 2006 Baltic Sea Region NAFTA EU-15 British Isles Iberian Peninsula Oceania ASEAN Central European Region

6. 6 Copyright 2006 © Christian H. M. KetelsState of the Region Report 2006 Patenting Intensity over Time Baltic Sea Region Countries Source: USPTO (2006), author’s analysis.State of the Region-Report 2006 Patents per 1000 Capita

7. 7 Copyright 2006 © Christian H. M. KetelsState of the Region Report 2006 Knowledge Creation Top Universities in the Baltic Sea Region Copyright © 2005 Institute of Higher Education, Shanghai Jiao Tong University

8. 8 Copyright 2006 © Christian H. M. KetelsState of the Region Report 2006 Integration Regional integration level Source: WTO, UNCTAD, national agencies, author’s calculations +0.1% +2.1%

9. 9 Copyright 2006 © Christian H. M. KetelsState of the Region Report 2006 Microeconomic Capacity Business Competitiveness Index Ranking over Time Central Europe Baltic Sea Region Source: Global Competitiveness Report (2006), author’s analysis. Rank 5 15 25 BCI – Overall Index NBE – Business Environment Quality COS – Company Sophistication

10. 10 Copyright 2006 © Christian H. M. KetelsState of the Region Report 2006 Business Environment Quality: Science

11. 11 Copyright 2006 © Christian H. M. KetelsState of the Region Report 2006 Microeconomic Capacity Innovative Capacity Source: Porter, Stern, Delgado (2006), author’s analysis. Rank 1 40 30 20 10

12. 12 Copyright 2006 © Christian H. M. KetelsState of the Region Report 2006 Policies for Competitiveness Upgrading General Business Environment Upgrading InnovationCluster Integration with Russia Branding the Region National and regional efforts Efforts by cross-national institutions Cross-national co-operation by national institutions

13. 13 Copyright 2006 © Christian H. M. KetelsState of the Region Report 2006 Innovation: Issues Universities: Do we need presence at the global top? Companies: Do we understand the R&D strategy of the private sector in the Baltic Sea Region? Does it influence policies? Non-research driven innovation: How to measure/how to mobilize? Demand-driven innovation: How to systematically leverage regional demand? Policy mix: How to integrate policies with an impact on innovation across instruments and geographic levels? Communication: Who knows what the Baltic Sea Region is doing for innovation?

14. 14 Copyright 2006 © Christian H. M. KetelsState of the Region Report 2006 Back-Up

15. 15 Copyright 2006 © Christian H. M. KetelsState of the Region Report 2006 Prosperity Cross-National Regions and BSR Countries Baltic Sea Region Iberia NAFTA Central Europe EU-15 EU-10 GDP per Capita, US-Dollar, PPP, 2005 Growth of Prosperity, CAGR, 2000 - 2005 Source: Groningen Growth and Development Centre and The Conference Board (2006), IMF (2006), authors’ calculations ASEAN BRIC Oceania British Isles Denmark Estonia Iceland Latvia Norway Lithuania Sweden N Poland N Russia Finland N Germany

16. 16 Copyright 2006 © Christian H. M. KetelsState of the Region Report 2006 Prosperity Generation Cross-National Regions GDP per Capita (PPP) Purchasing Power-Factor Productivity- Factor NAFTA B ISLES OCEANIA EU-15 IBERIA Baltic Sea Region CER EU-10 ASEAN BRIC ASEAN EU-10 CER IBERIA NAFTA OCEANIA EU-15 Baltic Sea Region B ISLES BRIC ASEAN OCEANIA NAFTA IBERIA Baltic Sea Region EU-10 B ISLES CER EU-15 B ISLES NAFTA OCEANIA Baltic Sea Region IBERIA CER EU-10 ASEAN BRIC Employment- Factor = xx Source: Groningen Growth and Development Centre and The Conference Board (2006), authors’ calculations

17. 17 Copyright 2006 © Christian H. M. KetelsState of the Region Report 2006 Investment and Exports World Export Market Share over Time Central Europe Baltic Sea Region Source: WTO (2006), author’s analysis. World Export Market Shares Total Goods Services

18. 18 Copyright 2006 © Christian H. M. KetelsState of the Region Report 2006 Investment and Exports FDI Inflows over Time European Union Baltic Sea Region Source: UNCTAD (2006), author’s analysis. FDI Inflows as % of Gross Domestic Investment World Central European Region Inward FDI Stock as % of GDP, 2004 European Union:32% Baltic Sea Region:32% Central European Region:23% World:22%

19. 19 Copyright 2006 © Christian H. M. KetelsState of the Region Report 2006 Patents per 1000 Capita, 2005 Growth of Patents per Capita, CAGR, 2000-2005 Knowledge Creation Patenting in the United States Source: USPTO (2006), author’s analysis. Denmark Finland Germany Russia Sweden Norway United States Japan Taiwan France UK Canada Switzerland Italy South Korea Australia Israel Singapore Hong Kong Ireland Baltic Sea Region Austria NL Iceland New Zealand Spain Malaysia South Africa Hungary China (.3, +27%) India (.3, +22%)

20. 20 Copyright 2006 © Christian H. M. KetelsState of the Region Report 2006 Integration Foreign Direct Investment Flows Share of inward FDI from other BSR countries, 1999 - 2004 Source country Source: UNCTAD, national statistical offices, author’s calculations BSR average

21. 21 Copyright 2006 © Christian H. M. KetelsState of the Region Report 2006 BCI Value, 2006 Dynamism Score, 2002 - 2006 India China Pakistan Italy Finland Australia Sweden Norway Hong Kong Japan Portugal Malaysia Turkey El Salvador Peru United States Germany Chad Mali Vietnam Malawi Zimbabwe Other European countries Estonia Chile Switzerland Iceland Ireland Paraguay Dominican Rep. Ethiopia Bolivia Mozambique Nicaragua Honduras Bangladesh Nigeria Brazil Trinidad Slovenia Russia Spain New Zealand Colombia Jordan Greece South Africa Ukraine Thailand Argentina Slovak Republic Lithuania High Low Below averageAbove averageAverage Baltic Sea Region Denmark Latvia Poland Baltic Sea Region Microeconomic Capacity Competitiveness Dynamism Other countries Source: Global Competitiveness Report (2006), author’s analysis.

22. 22 Copyright 2006 © Christian H. M. KetelsState of the Region Report 2006 Microeconomic Capacity Doing Business in the Baltic Sea Region Ease of Doing Business by Element Source: World Bank – Doing Business (2006), author’s analysis. 15 23 24 29 35 43 52 53 74

23. 23 Copyright 2006 © Christian H. M. KetelsState of the Region Report 2006 Russia: Opportunity and Challenge Competitiveness Prosperity Note: Prosperity – GDP per capita (PPP adjusted); Competitiveness – Business Competitiveness Index rank Source: Groningen Growth and Development Centre and The Conference Board (2006), Global Competitiveness Report (2006), authors’ calculations 2001 = 100%

24. 24 Copyright 2006 © Christian H. M. KetelsState of the Region Report 2006 Lisbon Agenda-Performance Lisbon Agenda Score, Last Available Year Change of Lisbon Agenda Score, Last to Previous Year Source: EU Structural Indicators (2006), author’s calculations Baltic Sea Region Norway Denmark Ireland Lithuania Latvia Germany Iceland Finland Sweden Czech Rep. Austria Slovenia Luxembourg UK NL Belgium France EU-25 CER Cyprus Hungary Greece Italy Portugal Slovakia Estonia Other countries Baltic Sea Region Poland Malta Spain

25. 25 Copyright 2006 © Christian H. M. KetelsState of the Region Report 2006 National Lisbon Agendas from the Baltic Sea Region

26. 26 Copyright 2006 © Christian H. M. KetelsState of the Region Report 2006 Public Risk and Loan Capital Providers - Examples

27. 27 Copyright 2006 © Christian H. M. KetelsState of the Region Report 2006 …but the external environment is getting more challenging …but low investment and stagnant export shares are a concern …but especially non-European regions have been more dynamic …that need to move to the next level of consistency and ambition The Top of Europe in Global Competition The Baltic Sea Region Is a prime beneficiary of globalization…. Continues to deliver strong prosperity growth…. Is one of the most competitive locations of the world Is home to many efforts to upgrade competitiveness